Happy Friday! 

Every week, we dive deep into macro trends, analyze asset movements, and uncover the best value plays in the world of macro. These insights are shared with hedge funds and institutional clients, and each Friday, we bring them directly to you.

While the macro landscape can be complex, we believe it doesn’t have to be intimidating. In this recurring series, we break down the key takeaways from the week, explain what we’ve told hedge funds, and outline how we’re trading these ideas — all in a straightforward and actionable way.

As always, let’s have a look at the current portfolio setup before we jump into the macro

The portfolio is performing decently, although there has been somewhat of a pause in the whole reflation narrative as we have received a couple of macro releases that just missed the mark relative to consensus—such as yesterday’s GDP report and activity surveys. Beneath the surface, however, consumption and spending trends are improving rapidly, as evidenced by the massive surprise in personal consumption in the GDP report and today’s personal consumption data.

The immediate concern is that spending trends are running somewhat hotter than income trends, a pattern we’ve observed for several months now. As a result, consumers are either tapping into savings or saving less to sustain their spending levels.

We are comfortable with the current portfolio setup, favoring a tilt toward risk assets amid this spending frenzy. Given Powell’s remarks during Wednesday’s FOMC press conference, the Fed has effectively placed a ceiling on how high rates can go. By leaning dovish into a stable economy, they have de facto allowed real rates to soften—great news for risk assets. Additionally, financial conditions are already easing.

We’re getting the sense that global central banks will, at max, hold rates steady, even if inflation continues to run hot. Powell explicitly stated as this during the press conference, despite removing the phrase about inflation making progress toward 2%, and the FOMC meeting was likely the final nail in the coffin for both the USD and bond yields – which is great news for high-beta equities.

Chart 1: The Fed is leaning dovish into this? Buy risk!