Historic Decoupling!

“Look, there is going to be a natural adjustment as we move away from public spending to private spending. The market and the economy have become hooked, become addicted, to excessive government spending and there’s going to be a detox period”- Scott Bessent, Treasury Secretary.

Never in modern history have we witnessed a US administration working hard to “engineer” a recession in its early days to bring down the “treasury” yields, sacrificing equities/ risk assets in the process.

Yes, folks, that’s the bitter truth. The Treasury Secretary has mentioned on record that there will be a “detox” period as the US Government fires hundreds of thousands of employees and reduces “excessive” government spending to balance the budget and rein in the ballooning fiscal deficit.

As a result, we are at the stage where POTUS had to intervene this week to “control” the damage that DOGE has inflicted in recent weeks. Furthermore, the administration’s focus is to “reprivatise” the economy, which is bullish in the long term but will entail short-term pain.

On the other hand, as the US abandons Europe, European governments have drafted an ambitious plan to spend billions of euros on infrastructure and upgrade their defence capabilities.

We believe that as the US prepares to exit NATO, Europe will have to increase its defence spending further. This will stress the fiscal capability of the European governments as bond vigilantes run wild.

This week, we saw a historic rout in the European bond markets.

Therefore, we believe that we are entering unchartered territory. For the first time since the 2008 GFC, we are witnessing historic decoupling across global bonds and equities, creating fascinating opportunities for traders and investors.

We are in a period where the synchronised moves have ended, and every demography, due to a multi-polar world, will undergo moves based on the domestic macro factors and the liquidity conditions.

Nonetheless, a black swan event or a severe global recession will lead to synchronised moves across assets globally.

Let’s comprehend the macro data and its impact on the cross-asset movement.

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US/ Dollar/ Gold/ Bonds!

The first week is always super important as we receive the all-important ISM data, our favourite metric for tracking the cyclical economy.

We also access labour market conditions via NFP and JOLTS (JOLTS was delayed this time).

While the ISM Manufacturing headline number came in at 50.3 (expansion), as we always say, “the devil lies in the details.”

The New Orders Less Inventories plunged sharply to -1.3, indicating that the readings of the headline index in the next few months would fall.

Furthermore, the price component jumped to a mind-boggling 62.4, likely pricing in the effect of tariffs (front-loading).

Thus, the data might remain volatile for the next 2-3 months due to the ongoing tariff situation.

Moving on, the ISM Services, which has seen wild swings in the last few months, beat estimates, with the headline index coming in at 53.5 vs. 52.7 (estimates). Note that above 50 indicates expansion.

The surprise once again was the ISM Services Prices Paid, which came in at a whopping 62.6.

We also posted the chart last month and mentioned that elevated ISM Services Prices indicate that CPI is headed up eventually.

Let us move to the piece of the puzzle that has the potential to drastically alter the Fed’s rate trajectory.