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This may seem inconsistent with many peoples’ views on the economy.

Supply bottlenecks remain. High frequency economic data has been mixed but Data Surprise indices continue to tick higher. The Fed are contemplating a faster taper. The next CPI report is due Friday & the top end of the forecaster’s range includes prints of 7.0%+.

It is, however, consistent with the flattening of the US yield curve. Thus far at least, the Fed’s policy response is seen as capping the rise in inflation.

It also reiterates the need for equity managers to understand macro. Recent market volatility underpins the idea equity markets are struggling to compute the degree to which elevated valuations are simply a function of Fed easy money policies, & how much is due to healthy underlying company fundamentals. The latter requires stock picking skills. The former requires a robust framework to quantify the myriad of macro risks facing investors.

Qi fair value for HYG now appears to have bottomed. In fact, RETINA™ is flagging an inflection signal with both spot & model value turning higher over the last 3 days.

Another US High Yield ETF JNK is also being flagged by RETINA™. Again a bullish inflection signal, this time with spot 1.4 sigma (1.0%) low versus model value

Away from ETFs & for those executing in Fixed Income markets, CDX US High Yield spreads are 1.6 sigma too wide & once again the recent trend towards wider spreads in macro model value appears to be topping out.

All three back-test well. Using current FVGs as entry levels the hit rates are 54%, 60% & 88% respectively.

Qi’s S&P500 model remains out of regime. In part because long-held sensitivity to credit spreads has waned. It will be interesting to observe whether a potential turn in credit spreads provides a broader fillip to risky assets.

In the chart above we take a handful of Qi models for US equity indices, style factors & cyclical versus defensive sector RV pairs.

Any model to the right (left) of the vertical zero bound has a positive (negative) relationship with Quantitative Tightening expectations. Red (green) models above the horizontal zero bound are rich (cheap) versus their macro regime.

The widespread perception that Value outperforms Growth during a Taper Tantrum is empirically borne out at both the large cap (VTV vs. VUG) & small cap (IWD vs. IWF) level. Note, however, both show Value as around 0.5 sigma rich to Growth already. Not large but, to some degree, rising rate vol / higher yields are priced already.

The picture at the sector level also confirms a popular narrative - Technology screens as the big loser relative to Energy & Financials in a taper tantrum scenario. Both XLE vs. XLK & XLF vs. XLK screen as modestly cheap to macro fair value

A potentially attractive entry level for believers in a more aggressive Fed, although model value is heading lower in both cases. In addition to QT expectations, to outperform Financials need tight credit spreads while Energy needs low risk aversion.

Other cyclical / defensive sector pairs such as Industrials versus Health Care, or Materials versus Utilities are noticeably less sensitive to the speed with which the Fed normalises their balance sheet.

There’s no valuation edge but the technology angle to Solar (TAN) & Clean Energy (ICLN) means again they screen as investments vulnerable to accelerated Fed QT.

It is also below macro model value. The latest widening in HY credit spreads leaves spot HYG 1.4 sigma or 0.9% cheap to model. While that FVG is towards the bottom end of recent ranges, model fair value is trending lower. When fundamental macro conditions continue to deteriorate as they are currently, Fair Value Gap signals come with a health warning.

It is worth comparing the US High Yield model to its Asian equivalent. The iShares Asian High Yield ETF AHYG is in a strong macro regime but, in contrast to the US, it screens as rich to model. A +1.1 sigma FVG means it is 6.9% above macro fair value.

Like US High Yield, macro fair value is trending lower. The recent bounce in AHYG has not been supported by macro factors, but by flows – the ETF has seen a surge of inflows of late.

In Asia, hopes Beijing eases policy to help the property sector has prompted a wave of bottom fishing in AHYG. Thus far, the flow-induced rally exceeds any improvement in macro fundamentals. The macro environment is also poor for US High Yield, but there spot HYG has priced in a fair degree of bad news.

Previous analysis has discussed how the relative value between Financials & Real Estate can be used a way to capture the equity market’s view on interest rates - REITs tend to outperform (underperform) banks when bond yields are falling (rising).

The FVG on XLF vs. IYR has already corrected. From -1 sigma cheap on Friday to zero now. The move in bond yields post Powell’s renomination as Fed Chairman has seen Financials outperform.

Similarly, the -1 sigma FVG early in Sep occurred a few weeks before a 25bp back-up in 10y US Treasury yields. This begs the question can the Financials / Real Estate ratio offer any signal for US yields?

On the chart above the green vertical lines show every time the XLF / IYR ratio has hit 1.5 sigma cheap on Qi. That’s happened 12 times since 2015. On four occasions 10y US yields fell over the next few weeks; but eight times yields rose &, on average, that move was worth 7bp over the subsequent 4weeks .

A long way from being conclusive, but an example of how to use Qi data in your workflow. Markets often work with leads & lags; different asset classes discount macro shifts at different speeds. The Qi framework helps highlight how dislocations in one corner of the market can help signal opportunities elsewhere.