It's Time To Be......Cautious!

As we near the end of a historic year where the US benchmark indexes led by the Magnificent 7 gave stupendous returns, the “everything rally” of the last two months indicates early signs of fatigue.

On the contrary, fund managers across the world are now prepared for a perfect “soft landing”, with a majority of them overweight bonds (duration) at a time when the markets are pricing more rate cuts than even the dovish Federal Reserve (In fact, the March rate cut is a done deal as per markets).

Source: BofA

Furthermore, a lot of cash from the MMFs in recent weeks moved to equities and bonds as funds globally chase the meltup across various asset classes.

As a result, the cash at major fund houses is below 5%, indicating extreme bullishness.

One can observe that active managers had less than 25% of exposure to equities (calculated via NAAIM) in late October; however, the current exposure stands at 97.3%, the highest since the markets peaked in August.

Nevertheless, as a systematic macro investor/trader, one needs to stay focused (and data dependent) and doesn’t need to fall for the innumerous narratives floating around.

In the past few days, we have churned a lot in line with our “Global Outlook 2024” and our macro thesis with prudent position sizing to manage risk (the top priority).

Let us take a deep dive and understand what this week’s macro data tells us (and justify the position that we initiated this week).

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US!

Federal Reserve’s preferred inflation gauge was the biggest data point of the week, which witnessed low volumes of trading at bourses as the year-end approaches.

The PCE came in line with the expectations with core goods inflation plunging due to benign used car prices.

Source: Macrobond

Nonetheless, the services ex-housing, which JayPo popularized last year, remains sticky.

The reason for the stickiness of this component of inflation has been none other than the