Nonetheless, the bear market gave rise to a mega bull market as higher rates became a blessing in disguise for cash-rich tech companies.

Furthermore, the launch of ChatGPT and the subsequent AI wave drove trillions of dollars in hyperscalers’ spending, creating generational wealth across a spectrum of companies, from semis to cables to HVAC.

We are now at an inflection point as competitive intensity erodes frontier models' profitability.

We've seen this over the past few months, as open-source Chinese models took the AI ecosystem by storm.

While AI token usage has continued to surge and hit a record high, token spend is down 10% from the 27th July peak.

Notably, the spend per token is down 40% from the peak as token prices have crashed.

Furthermore, the credit market is in full-blown panic, with markets now pricing in a 20% probability of default for Oracle.

Oracle’s CDS has surged to a record high as market participants continue to hedge their equity exposure via CDS.

Meanwhile, in a mind-blowing stat, more than half of S&P 500 stocks are in a bear market, and 80% are 10% off their peak.

As tech problems abound and equity market internals weaken, freight costs for transporting oil have reached unprecedented levels.

The tanker crisis has rattled energy markets, and no end is in sight; there is no magic wand to solve it.

We may be on the verge of an energy crisis similar to the 70s, and the geopolitical deadlock needs to end immediately, or the supply-chain rupture will take months to heal.

October is turning out much better than September, and we are hopeful for a great end to the year.

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

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

Before we begin analysing the macro data, we want to look at the upcoming mid-term elections.

We believe Republicans are likely to lose, given Trump's record-low approval rating.

We don’t expect anything to change overnight, and with only 3 weeks to the election, an ATH stock market won't save the Republicans.

ISM Services was the only major macro release we tracked closely this week.

ISM Services came in at 54.9, a tad lower than expectations at 55.

Respondent comments suggest that while demand is resilient, pricing pressures are widespread across industries.

Tariffs are still hurting, while higher fuel costs, especially diesel, are now creating havoc on industries.

ISM Services Prices surged to 74, and given its tight correlation with inflation, CPI/PCE is likely to rise in the coming months.

While last week ISM Manufacturing employment indicated a turnaround in the employment situation (due to the AI rollout), this week the Services Employment PMI also moved into expansionary territory, suggesting the labour market is not a concern.

Overall, the US economy remains resilient, but higher prices and rates might create issues in the coming months.

Equities!

A deeper look at market breadth shows some respite, likely as yields cooled a bit from the top.

S&P 500 members at 52-week highs, rather than lows, were positive after a streak of negative prints throughout late September.

Nonetheless, 47.6% of its members were still below 200 DEMA, a mind-boggling figure for an index at ATH.

When we look at charts,

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1. Explosive Setup Confirmed: 25th January 2025.

2. Explosive Setup Part 2: 7th June 2025.

3. Explosive Setup Part 3: 15th November 2025.

4. Explosive Setup Part 4: 14th March 2026.

When we wrote Part 1, SPX fell by more than 20% in the next month.

In Part 2, we were extremely bullish on equities (especially small caps), and the bull market began.

In Part 3, we expected elevated cross-asset moves (Gold and Silver massive run began)

In Part 4, SPX fell another 6-7% as the market rout deepened.

While the equity markets (AI) remain euphoric, credit markets continue to flash warning signals.

In fact, we have been indicating this for the past few weeks now, and the right word to use here is that hyperscalers' and chip companies' credit is sulking.

While the IG spread has reached 86 bps, the AI-related issuers' spread has blown to 115 bps+.

The rout is now spreading to chip makers as well, as Broadcom (AVGO) CDS reached fresh 52 Week highs on news of Broadcom’s $60 billion chip SPV for Anthropic.

Circular financing has grown much bigger and reached unprecedented levels.

We have received a lot of queries from paid subscribers in our chat and DMs about the dashboard/Macro Musings.

We want everyone to know it’s shaping up very well, and it will take 30-45 days before we go live with the full terminal.

Sharing a snapshot of the live terminal (work in progress):

PS: Paid subscribers will get access to the beta version before the end of the month.

Due to the market carnage beneath the surface, we have had a bad run recently, but we expect to recoup the losses in the coming weeks and months as we follow risk management prudently.

When we say carnage, you may be shocked to learn that RSP (equal-weight index) is down 5.3% (at 200 DEMA), while SPX is up 1%, led again by chip stocks (as we saw after the ceasefire in April).

Note that our PF hit YTD highs around mid-August, and September was one of our worst months (comparable to the March drawdown).

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

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

This week was extremely critical for macro as we got GDP, PCE, ISM, JOLTS and NFP.

Our favourite metric for tracking the cyclical economy has been ISM Manufacturing.

ISM Manufacturing came in at 54.5, 50 bps below market expectations.

Nonetheless, the cyclical continues to fire thanks to the enormous AI capex.

Furthermore, Orders Less Inventories rose again to 6.7, suggesting the headline PMI could move higher in the coming months ahead of the festive season.

The silver lining was higher backorder backlogs, attributed first to producers being unable to meet high demand (longer lead times largely related to AI rollout) and second to supply chain disruptions.

Respondents' comments confirm this. Interestingly, the tariffs still remain one of the biggest problems.

Thus, due to persistent policy U-turns and higher pump prices, ISM prices are going bananas, with the print coming in at 77.9 v/s 77.1.

We all know inflation is a lagging indicator, and the recent rise in diesel prices and higher ISM prices will show up in the data over the next few months, with a lag.

Headline PCE came in at 0.3% MoM, and Core PCE came in at 0.2% MoM.

Interestingly, the BEA implemented a methodology change (software, legal, and PM fees); as a result, it revised the PCE readings lower (July core was lowered from 3.34% to 2.98%).

Long-time subscribers know we are not a big fan of GDP because it’s a lagging indicator and is constantly revised.

Q2 GDP was revised higher by 70 bps and, unsurprisingly, much of the contribution now comes from equipment and IP related to the AI rollout.

Fed’s preferred GDP metric: final sales to private domestic purchasers, which exclude trade, inventories and government spending, increased at a 4.6% pace in the second quarter and was revised up from 4.2%.

Now let us decode the labour markets:

We have got 6 labour market charts today (some will be visible only to paid subscribers):

• JOLTS-1: The Fed’s preferred labour market indicator is Vacancies/Unemployed. The indicator bottomed out in late 2025 and moved up significantly this year. However, it fell again to 1.01. Watch it carefully; if we move to lows again, expect the bond market to take off the hikes rapidly.

  

• NFP-1: The US economy added 29k jobs in September, significantly below market expectations. Education and health continue to remain the top contributors. The cyclical economy also added jobs and remains robust (construction/ manufacturing). Government, IT, and financial activities continue to shed jobs, a trend visible since the beginning of the year.

  

• NFP-2: When the labour market deteriorates, part-time jobs rise, and people holding multiple jobs also witness an increase. Nonetheless, the post-COVID inflationary wave has led people in the bottom income decile to take on multiple jobs to sustain their standard of living. Furthermore, the “side hustle” culture and multiple work avenues in the AI era have led people to take on multiple jobs. Nevertheless, if the trend continues and we reach 6% (multiple jobholders), it will be cause for concern.

  

• NFP-4: Not only was the headline number weaker, but the downward revisions were also stark. Total revisions over July and August came in at 60k. Notably, 18 of the last 24 releases were revised down, as the labour market is bogged down by structural factors such as a halt in illegal immigration (resulting in breakeven moving down from 150k to 25-30k)

  

Equities!

SPX!

Bulls have been defending the 7610/20 levels vigorously.

However, they haven’t been able to pull the index to fresh ATHs despite repeated attempts, so the consolidation continues.

Yesterday in the chat section, we shared the following chart:

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2026 has been one of the toughest years for investors and traders, as global financial markets have tested patience, long-term correlations have broken down, and governments have intervened in financial markets to protect hegemony.

September saw a new global monetary tightening cycle as the Fed, ECB and the BoJ raised rates by 25 bps.

Let’s examine 14 charts to analyse global macro and financial market internals!

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According to the data, diesel prices are more than $200/barrel; thus, WTI/Brent crude doesn’t reflect the energy crisis the world is undergoing.

Furthermore, VLCC tankers, which transport oil from the Middle East to Asia, have seen prices explode.

The relentless attacks on the refining infrastructure from Russia to Saudi Arabia continue.

As a result, there is no magic wand to increase refined-product production overnight.

The million-dollar question becomes: how much more will prices rise before demand takes a hit?

Previous episodes of the energy crisis show that spikes in energy prices end in a recessionary/stagflationary episode.

Will it be the same this time?

It all depends on how long the crisis lasts; thus, it’s too uncertain to predict anything today.

On the AI front, we are witnessing a historic price war as open-source models' popularity rises manifold.

AI’s price fall in the last 18 months is the fastest ever for a new technology.

We expect the fall to continue, especially post Meta’s Muse compute offering.

Market participants suggest Meta has excess compute and is offering nearly “unlimited” tokens.

Nonetheless, with saturation in model development (in terms of intelligence), the focus will now shift to competitive intensity and profitability, along with AI enterprise adoption, which is still in single digits.

2026 has been one of the toughest years for investors and traders alike as historical macro correlations broke in real time.

We are at a 60% hit rate, with an average winner at 6.96% and an average loser at -4.14%.

We are up 4.72% YTD, and September has been one of the worst months, as equity markets have disappointed, with the index up only due to a handful of stocks while broader markets have underperformed.

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

Macro!

US!

It was a data-light week, and ex-housing data; one of the most important data point was durable goods data.

Durable goods non-defence ex-air came in at 1.6% v/s 0.6 expected and surged to a record $87.6 billion.

The surge, as we have been indicating in the past months, is led by the AI wave.

Since hyperscaler capex has not slowed yet, we expect durable goods orders to continue moving higher in the coming months.

Germany!

Soft data in Germany continues to improve, and higher energy prices have yet to dampen sentiment.

The IFO business climate moved further higher to 89.9.

With a sustained rise in refined products and natural gas prices, we expect the sentiment to turn sour in the coming months.

On the flip side, if energy prices move lower (resolution of Russia/Iran conflicts), expect the IFO to surpass the 90 threshold.

Equities!

Before we discuss our PF and returns YTD, we would like to shed some light on the AI bubble and market breadth.

The hyperscalers' off-balance-sheet commitments have now skyrocketed to more than $3 trillion.

This, along with prospects of lower ROI on the enormous capex, remains the biggest risk to the US equity markets.

Furthermore, CDS on hyperscaler debt remains elevated as market participants continue to hedge AI equity and debt exposure via CDS.

We remain well hedged, as our paid subscribers are aware and as our PF shows.

As of Thursday's close, the market breadth has deteriorated to alarming levels.

For thirteen consecutive sessions, more S&P500 members hit new 52 Week lows than a new 52 Week high.

The equity book as of yesterday's close:

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The Fed under Warsh raised rates by 25 bps, and the bond markets rejoiced for a moment.

Warsh termed the move as removing a “dose of accommodation”, and if the world’s most powerful central banker is to be believed, policy is still accommodative.

One of the biggest drivers of hawkishness is the worsening energy crisis, which will likely broaden inflationary pressures.

Due to skyrocketing refined product prices, freight costs are through the roof.

We are now approaching the 2008 peak, and if the situation isn’t resolved in “weeks”, we might surpass the 2008 levels.

We have been mentioning the global refining crisis for months, and the situation has worsened significantly due to the Russian refining crisis.

Russia has banned diesel and gasoline exports due to the Ukrainian attacks on the refining infrastructure, which has significantly tightened the global market.

Our diversified global PF is down 2% in September, and we are now up 5.12% YTD.

Today we will take a deep dive into the monetary policies of the Fed, BoE and BoJ and comprehend the cross-asset markets.

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

For those who don’t remember the day Warsh was appointed by Trump, the Silver and Gold bubble burst (31st January) as markets viewed Warsh as a hawk (markets feared a balance-sheet contraction due to Warsh’s past views).

We believe Warsh has lived up to his reputation despite some early jitters.

There was unanimous consensus on a rate hike this week, and it was the first time since 2008 that all FOMC members were the most bullish on growth prospects.

This was also reflected in the SEP projections, as the Fed raised real GDP projections by 10 bps.

Real GDP is expected to rise 2.3% this year and 2.4% next year.

Total PCE inflation is projected to run at 3.7% this year and fall to 2.3% next year.

The unemployment rate holds steady at about 4.1%.

Furthermore, the median dot now indicates 50 bps of more tightening than the last SEP as inflation remains sticky.

We have been closely monitoring the long-run FFR, which was further raised by 10 bps to 3.2%.

This means that, due to structural changes (demographics, geopolitics, fiscal mess, etc.), the Fed expects neutral to be higher than it was a decade ago.

The presser was an eye-opener, as Warsh explicitly raised concerns about inflation.

“Don’t have second and third order effects in the economy.”

“So, our predominant focus is on the price-stability side of our mandate. The plain fact is that inflation is too high and has been for too long.”

“Too many categories are still posting increases above 3 percent, on both a 6- and 12-month basis.”

In the last 18 months, we have seen various shocks which have exacerbated the inflation problem.

First, it was the tariff-led shock, and now it’s the war-led supply shock, which has driven diesel prices (and other product prices) to extremely high levels.

If the prices remain at current levels for a few more weeks, we will see higher prices reflected across both goods and services.

Some market participants expected Warsh to announce SEP redundant; however, no decisions have been taken yet, and we were pleasantly surprised that Warsh is a man of principles and hope he will adhere to them.

“I’m not going to pre-judge any future decisions we make. You might have heard me say in Jackson Hole, I committed to a discipline, a set of principles.”

We have always believed that in macro, the trend matters, and one should not extrapolate from a single data point or reading.

“I was not waiting breathlessly on what any particular data was, whether it was retail sales this morning, or a CPI print last week. I’ll just reiterate, trends matter.”

Warsh mentioned three reasons driving yields higher.

I’ll say three things, first is economic strength. Part of the reason why we’ve seen over the course of 2026, long-term yields go up is the economy is strengthened.

Second reason, competition for capital. The surge in capital expenditures, which I referenced in my remarks, is real, and the so-called hyperscalers are out in the market raising funding, and so the competition for capital is real and I think it partly explains the increase in yields.

The third, is geopolitics.

Overall, we believe the Fed did what was appropriate.

If inflation driven by higher fuel prices continues to broaden (second- and third-order effects/deanchoring of inflation expectations), we expect the Fed to hike without hesitation.

US retail sales came in higher than expectations with a 6% YoY rise (1.2% MoM v/s exp 0.8% MoM).

Retail Sales Ex-Auto came in at 1.4% MoM v/s exp 0.6% MoM, and Retail Sales Control Group came in at 1.4% MoM v/s exp 0.5% MoM.

When we dig deeper, gasoline stations led the rise.

The only laggard was building materials (weak housing), which came in at -0.2% MoM.

Equities!

SPX!

SPX rebounded off the strong support at 21 WEMA and closed the week above the key support level of 7620.

Nonetheless, one striking market internal metric is flashing a warning sign.

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2026 is proving to be an unforgettable year for the financial markets across the board.

Regulators are openly boasting about manipulating global financial markets and going head-to-head with the trading community.

Price discovery has seen a complete overhaul over the years, but this year’s outcome will decide who the " house " is and to what level the manipulation will work.

In the past, we have seen that intervening in markets has been catastrophic for regulators; however, this year's persistent intervention could lead to something extraordinary and will likely transform how we trade and invest.

The highlight of the week was UST yields touching decadal highs as crude once again topped $100 as inflation fears resurfaced.

The move was chilling, especially coming hours after Bessent's “I am the house” comment.

Furthermore, Trump’s announcement of a $5000 dividend to every US citizen (adult) if Republicans win the midterms shook the bond markets.

The one All-Time High (ATH) that nobody saw coming in 2026 is the record diesel price.

Retail diesel crossed $6 per gallon this week in the US.

We've been warning our paid subscribers about attacks on the “global refining infrastructure” since the war broke out in the Middle East.

As supply shocks lead to a resurgence in global inflationary pressures, the ECB raised rates by 25 bps, and bond markets are now pricing in a significant hiking cycle for global central banks.

In the AI world, we again saw the Chinese open-source model ruining the party for the Americans.

This time it was Deepseek, which startled the world by announcing that V4.1 (it’s latest model) needs 1/4 of the HBM and 1/8 of the SSD storage; in other words, they have significantly reduced the memory and chip requirements.

This further cements our view that the semiconductor bubble has popped. As we progress (along with rising chip production in China), chip demand will normalise and inflated semi margins will mean revert.

This week, PF took a drawdown on the chin as broader equity markets underperformed the headline indices.

In the last two years, we have had only three negative months, and we expect September to turn around as the month progresses.

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

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

The US headline CPI came in line with expectations at 0.4% MoM, and the Core CPI came in at 0.3% MoM v/s expectations of 0.2% (rounding off, the exact number was 0.29%).

Looking at the 3-month annualised rates, the Supercore came in at 1.3%, while the core came in at 2%.

However, six-month annualised rates are trending up.

Note that CPI reports higher prices with a lag; with diesel prices shattering records, expect CPI to move higher in the coming months.

When we dig deeper, energy and airline fares added significantly to the headline CPI.

Used cars and trucks, along with Motor vehicle insurance, remain in the deflationary category.

The headline PPI came in line with expectations at 0.4% MoM, and the Core PPI came in at 0.2% MoM, 10 bps lower than expectations.

Energy continues to dominate, with more than half of the rise arising from fuel prices.

Meanwhile, goods PPI jumped more than 1.1% MoM.

US consumer credit shattered estimates, coming in at $18.1 billion vs $11.7 billion.

While the absolute number looks enormous, the “real” change in consumer credit (inflation-adjusted) remains negative.

Furthermore, the growth in revolving credit (credit cards) has been subdued, and student and auto loans, aka non-revolving credit, boosted July’s number.

Equities!

Last week, we mentioned the critical level of 7620, and SPX once again defended the level.

Note that we have always mentioned that

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We have been suspicious of this “weird” price action and have raised a red flag to our paid subscribers over the past few weeks.

Now the market participants have taken note as well:

The two most unusual price charts of the week are:

• Momentum (MTUM) & Mag 7: For the first time, Mag 7 has decoupled from momentum. Momentum (MTUM) has faced one of the biggest plunges ever seen and, as a result, the decoupling.

  

• Gold & BTC: The second is the positive correlation of Gold and BTC. The last time Gold & BTC were this positively correlated was in November 2020.

  

Notably, we have recognised much more while analysing market internals across assets.

We believe that the unusual behaviour can be explained by the following:

1. From energy markets to bond markets, governments are intervening in financial markets, which hinders normal market functioning.

2. Non-hedge-fund market participants are using AI to backtest and generate strategies based on historical correlations, which has likely broken correlations across the board.

Thus, expect the bizarre market behaviour to continue.

We are down 0.25% this month; however, we are up 7% YTD.

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

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

Our preferred indicator for tracking the cyclical economy is the ISM Manufacturing.

The headline index was slightly below expectations and softened a bit from the July reading.

This was largely due to lower new orders, imports and a fall in the backlog of orders.

Nonetheless, prices remain extremely high, partly due to supply chain pressures across industries.

The respondents’ comments are intriguing:

• “The economy is annoying; it is getting in the way of otherwise good business. We are making great new products but struggling to compete when prices escalate due to things like tariffs and the conflict in the Strait of Hormuz. I fear that the inflation caused by these factors will lead to lower sales and lower spending power of our customers. Call it inflation! At some point, it leads to an economic downturn or at least an economic pain for many consumers. It’s an uncertain year, our second in a row.” [Chemical Products]

• “The supply chain situation, especially in the electronics market, is going through another crisis even bigger and more complicated than during and post-COVID-19. That’s mainly due to AI infrastructure and uncertainties in the global market (for oil and other critical supplies) due to war in the Middle East and more complication on trade rules.[Computer & Electronic Products]

• Prices continue to rise on all goods. Suppliers are noting that energy, steel and labor costs are increasing very quickly. We continue to try to move products around to offset costs. We have moved more products to offshore sources to try to minimize cost impacts.” [Machinery]

The situation is so dire that it is being compared to the COVID era.

Orders Less Inventories has been consistently falling over the last few months, suggesting that the headline PMI will likely trend downward as we approach the mid-term elections.

ISM Services came in at 55.4, a slight beat against the market expectations of 54.1.

The index was pumped by higher New Orders, Business Activity, and Exports and Imports.

Overall, Services activity looks much more buoyant than manufacturing activity, according to the ISM data.

Nonetheless, the ISM Services prices remain extremely elevated and continue to move higher.

We have shown in the past that ISM Services Prices is tightly correlated with CPI/PCE data, and thus expect inflation to persistently print comfortably above 3% in the coming months.

We also got a slew of labour market data.

• ISM Employment: ISM Manufacturing and Services Employment PMI is undergoing divergence. While the services PMI has moved into the contraction zone (likely also due to the World Cup being over and the temporary layoffs related to it), manufacturing PMI continues to move higher. It is back in expansion territory after a long time.

  

• NFP-1: Leisure and hospitality saw an enormous addition of jobs, which was a bit surprising, as we expected a negative-to-flat print for the sector after the end of the FIFA World Cup. Local government was up 50k, as local school education added 42k jobs, offsetting prior-month losses. On the contrary, financial activities and information continue to lose jobs as AI-led automation leads to higher productivity. The UR came in at 4.1% and thus, the labor market remains exceptionally stable.

  

• NFP-2: The last two months saw stark negative revisions; however, even the revisions threw up a surprise this month, as June and July payrolls were revised upwards by 55k.

  

Equities!

SPX!

As discussed last week, SPX again took support at the “breakout” level of 7620.

Note that it has been 3 weeks since it has been taking support at the critical level, and we need to move higher; otherwise, we risk a break of the level and a test of 7450.

However, when we look at the internals, we believe that the momentum is gradually building in:

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2026 has been one of the toughest years for investors and traders, as global financial markets have tested patience, long-term correlations have broken down, and governments have intervened in financial markets to protect hegemony.

In the past few months, we have seen a relentless rise in Credit Default Swaps (CDS) for hyperscaler and chip companies.

Undoubtedly, markets are worried by the circular financing of the whole AI ecosystem.

Let’s examine 14 charts to analyse the global macro and internals of financial markets!

1. Led by a nearly 93.3% rise in crude oil prices YTD, DBC is the top-performing ETF this year with a return of 40%.

   Led by semiconductor stocks, the emerging market ETF (EEM) was the top-performing equity ETF.

   Gold lost its sheen after a stellar rally in January and is up less than 3%, as sentiment turned bearish due to crowded positioning.

   Thanks to semis, NDX has outperformed both SPX and the equal-weight index. Despite no AI story, Latam is up 16% YTD thanks to the commodity rally. The MSCI European ETF IEV is up 11.12%

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

   

2. No prize for guessing, as XLE remains the biggest gainer YTD thanks to an explosion in refining margins and product prices. Furthermore, crude continues to hover around $90.

   XLK has been the second-best performer, thanks to massive gains in Semis.

   The laggards have been XLC and XLY along with XLU.

   

3. You are not alone if you have been wondering about the “weird” market moves.

   The average pairwise correlation among stocks (rolling 3 months) has crashed to the lowest since 2000 (only lower for a brief period in 2017).

   

4. The predominant narrative at the beginning of the year, post the tsunami of agentic AI, was that software is dead, and the gold rush is only in the Semis.

   While SMH is down 20% from the peak (still up 50% YTD), the relative performance of IGV (software) has caught the semis bulls by surprise.

   

5. Digging deeper into the equity markets, an alarming trend emerged in the recently concluded earnings season.

   The “unrealised gains” in Anthropic, SpaceX, and other private companies accounted for 42% of the S&P 500's YoY earnings growth.

   Furthermore, bloated semi margins have driven all-time-high operating margins for the S&P 500.

   

6. Pre-COVID bonds were a natural hedge against stock volatility, so 60:40 portfolios were introduced.

   However, bonds have failed to provide a cushion, as they have been in a bear market post-COVID due to the inflation of the 2020s.

   Thus, stocks less bonds have returned a whopping 14.6% (a decade to August 2026), a rare feat.

   

7. The chatter is all about bonds and duration in markets as the government intervention has failed to push down long-term yields.

   We call this “normalisation” as term premium has risen to 73 bps after 97 months of negative term premium (Jan 15- Sep 24).

   The pre-GFC era had upwards of 150 bps of term premia; however, it also had a lower Debt/GDP ratio.

   

8. Before we end the US section, one chart that explains the rise and fall of the AI story.

   The token price index peaked when semis peaked, and since then, the token prices have crashed by 50%.

   Led by ultra-cheap Chinese open-weight models, token prices have taken a U-turn amid rising competition.

   

9. German industrial production rose 0.2% in June MoM, beating estimates (0.1% MoM).

   Furthermore, June orders jumped 3.1% MoM, led by machinery and electronics.

   Overall, the rebound after the March dip continues, and the recovery has been swift.

   

10. UK Q2 GDP slowed to +0.4% from +0.6%, but the composition improved sharply: Q1’s number was built on stock-building (+0.46pp) against a 0.42pp net-trade drag — goods landing in warehouses rather than final demand.

    Fixed investment contributed +0.24pp, the largest single component, with business investment up 1.7% on the quarter, and output 1.2% higher than a year earlier.

    

11. China’s macro has been deteriorating rapidly as the balance sheet recession accelerates.

    In July, both Households and corporates (private sector) went negative at once: households repaid RMB 460bn while companies repaid RMB 130bn.

    Ironically, China is perhaps the only country where bond yields continue to fall.

    

12. In the land of the rising sun, import prices rose by +29.1% in JPY, and July was the first fall in nine months (MoM).

    The story is the wedge: the contract-currency basis is +17.7%, so 11.4pp of that 29.1% is purely the exchange rate (higher USDJPP/ lower JPY).

    

13. The 3-2-1 crack spread went from $37 to $66 a barrel, +77%, against a five-year median of $28. That’s the 98th percentile of five years.

    The coordinated attack on global refinery infrastructure and declining inventories have been the tailwinds for higher product prices.

    

14. BONUS CHART: The darling of foreign investors: India has seen record derating. The MSCI India rolling 12-month return compared to MSCI EM fell to the lowest ever and, since the Korea bubble burst, has recovered.

    Nonetheless, if you believe in mean reversion, then we might see India outperform MSCI EM once again in the coming 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.

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

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

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

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

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

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

• US Macro Dashboard.

• US Custom Equity Sentiment Index.

• US Equity Markets Rotation Leaderboard.

• Global Cross-Asset Vol Dashboard.

• China and Japan Macro Dashboard.

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

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

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

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

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

Let us begin today’s newsletter!

Global Macro!

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

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

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

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

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

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

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

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

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

Furthermore, net exports were a major drag.

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

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

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

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

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

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

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

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

Equities!

First, the custom greed and fear index:

Read more

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

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

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

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

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

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

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

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

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

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

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

It was a data-light week in the US.

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

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

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

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

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

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

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

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

The curve is steepening, led by the long end.

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

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

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

Equities!

First, the equity sentiment index:

Read more

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

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

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

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

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

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

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

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

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

We will discuss more later on.

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

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

We remain confident in medium-term outperformance.

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

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

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

• US Macro Dashboard.

• China and Japan Macro Dashboard.

• Cross-Asset Volatility Monitor.

• Custom Equity Greed and Fear Index.

Stay tuned as we have much more in the pipeline.

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

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

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

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

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

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

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

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

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

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

There were two shockers of the week.

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

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

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

Retail Sales was the second biggest shocker of the week.

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

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

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

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

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

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

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

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

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

We also got the NFIB Small Business Survey.

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

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

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

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

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

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

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

Equities!

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

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

SPX closed at a fresh weekly ATH.

Our measured target from the breakout zone was 7850.

Read more

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

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

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

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

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

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

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

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

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

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

It was a data-heavy week in the US.

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

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

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

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

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

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

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

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

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

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

Labor Market!

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

  

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

  

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

  

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

  

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

  

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

  

Read more

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

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

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

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

We will discuss Fed policy in detail later.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Lower gasoline prices MoM were the reason for the fall.

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

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

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

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

Furthermore, the core PCE is proving sticky.

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

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

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

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

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

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

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

Now let us discuss the Fed policy.

FED!

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

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

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

As per Warsh:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Equities!

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Macro!

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

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

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

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

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

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

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

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

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

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

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

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

We also got the UK’s labour market data.

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

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

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

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

We also got the Claimant Count and Vacancy ratio.

Both indicators were stable after the drastic move last year.

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

Our Japan Macro Dashboard is also ready.

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

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

Equities!

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

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

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

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

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

Even small-caps have outperformed the growth factor.

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

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

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

We are positioned to maximise this opportunity.

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

Our positioning as of today is as follows:

Read more

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

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

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

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

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

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

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

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

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

As a result, momentum has witnessed a historic rout.

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

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

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

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

Our underperformance has now reduced to 9 bps.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

We also got the retail sales this week.

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

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

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

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

We also received the NFIB data.

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

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

Equities!

We mentioned last Saturday that

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

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

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

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

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

We also launched our US macro dashboard this week.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Nevertheless, the trend seems to be up.

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

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

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

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

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

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

Equities!

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

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

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

We will discuss this in detail later.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

  

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

  

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

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

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

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

Nevertheless, we navigated successfully after initial hiccups.

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

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

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

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

  

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

  

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

  

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

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

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

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

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

• Chinese underperformance.

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

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

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

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

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

Macro!

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

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

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

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

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

Both the cyclical and acyclical PCE have been trending upward.

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

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

Overall, it was a broad-based rise.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Equities!

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

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

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

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

Equity Allocation (as on 25th June):

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

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

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

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

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

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

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

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

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

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

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

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

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

Nevertheless, we still underperformed.

Reason?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Regime Change!

In Warsh’s own words:

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

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

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

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

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

Warsh has announced the formation of the following task force:

1. Fed communications.

2. Fed’s balance sheet policy.

3. Use and reliance on existing data sources

4. Productivity & jobs in an era of transformation.

5. Fed’s inflation framework.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Retail sales was the biggest data point of this week.

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

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

It was an all-around beat.

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

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

Equities!

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Note that the CPI is a lagging indicator.

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

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

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

Goods and Transportation also saw a double-digit rise.

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

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

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

Thus, we closely track the NFIB Small Business Survey.

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

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

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

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

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

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

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

Macro Outlook!

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