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‘This time is different’ are supposedly the four most expensive words in the English language. But the chart below shows why a discretionary client of Qi would not pull the trigger on the current signal.

It shows S&P500 macro-warranted fair value over a 4mth (blue) & 12mth (red) look-back period; i.e. given the growth/inflation mix, overall financial conditions & levels of risk appetite where 'should' SPX trade. Both ST & LT models show macro conditions are deteriorating.

Between them risk aversion & corporate credit spreads account for almost half of model value. Higher VIX & wider High Yield spreads are driving macro fair value lower.

Moreover, the picture is compounded when we run the same chart for US High Yield. Macro fair value for HYG is making fresh lows as it accelerates lower on both ST & LT models.

The only consolation for US equities is that the current FVG suggests it has discounted some of this bad news already. HYG is also cheap to model but ‘only’ 0.9 sigma (2.2%).

As well as choosing your assets & the Fair Value Gap trigger for trade entry, RETINA™ assigns a degree of confidence to each signal. Historical back-tests showing the efficacy of the signal, how macro model value is behaving & trend/momentum dynamics combine to assign conviction levels.

Four bar signals are our highest conviction ideas & here we look at their 2022 YTD performance in FX & macro equities (indices & index futures).

RETINA is available to all Qi clients - speak to your sales contact - & is available via Symphony or Slack. In Symphony, for example, subscribers received a signal in early March when e-mini SPX futures produced a -1.3 sigma Qi Fair Value Gap & a bullish inflection signal. The signal appeared like this:

Just before the long Easter weekend, two US reports posted material surprises to the upside relative to consensus. Between them, the University of Michigan Consumer Sentiment report & Empire State Manufacturing Survey added almost 80bp to tracking US growth.

Q2 US GDP growth was tracking at +0.6% QoQ last week on Now-Casting.com. It now stands at +1.5%, or 6% annualized. On Qi, US economic growth has spent much of early 2022 slightly below trend. These reports have pushed it well above recent trend.

This is unlikely to derail the strong narrative about economic pain ahead. Fiscal drag, Fed tightening, war in Ukraine & the impact on commodity markets, cost of living scares & demand destruction, lockdowns in China all make a powerful & toxic combination.

Moreover, the usual caveats apply. Two data points do not make a trend. Still, with mainstream financial media pushing an unambiguously negative newsflow, it is worth noting.

Ultimately, the recession script may still prove correct. However, the exact timing can deviate from previous cycles & from forecasts. Tracking real-time changes & knowing which assets are most sensitive to current growth rates should be a critical part of any investment framework.

The LT model is strong & stable - model confidence has been running at 80%+ since October - & the drivers reflect the importance of international trade. Stronger commodities & tracking GDP for Korea, China & the US feature prominently.

To that end note Now-Casting’s tracking GDP number for Korea has fallen from a run rate of almost 5% a month ago, to just under 3.5% today.

The desire for a weaker US Dollar is the other main driver & all of those macro dependencies explain why Qi’s model value is edging lower. Thus far, the KOSPI future has slightly lagged that downturn.

For those worried about the hit to global trade from the spread of Covid in China, it offers a potentially interesting trade expression.

The exception is Japan where Friday’s Economy Watchers Survey report produced a notable beat in the Current Conditions index. Usual health warnings given it is only one data point but it boosted Q2 tracking GDP growth by 71bp taking it from a small negative to +0.5% QoQ. On Qi, it is the only major economy posting above trend growth.

Stronger domestic growth features as a top 10 positive driver for both the Nikkei & TOPIX on Qi’s Long Term models. But only just. The LT relationships put more emphasis on healthy risk appetite & tight credit spreads.

VIX & credit dominate Qi’s Short Term models too but this time, at the individual factor level, Japanese GDP is the biggest single positive driver. The model also emphasises a weaker Yen.

As a rule, we default to our LT models for their more stable relationships but, in volatile markets, the ST models can be useful in picking up near term trends.

On this occasion, if the high frequency economic data can build some positive momentum then, all else equal, that would help macro model value turn higher. The Yen may have lost its safe haven status but could Japanese equities provide some respite from global recession fears?

*** RETINA™ subscribers can now receive real-time alerts when Now-Casting tracking GDP numbers experience a meaningful shift. ***