Welcome back to our monthly regime update, sharing insights from our data hub on cross-asset returns in different regimes.

Coming into July, we wrote: “While we are not convinced of the general US recession call following the poor ISM Services report, our forecasts for the coming month place us in the ‘QE (Like)’ regime bucket – Growth lower, Inflation lower, and Liquidity higher. That said, our slightly rosier view on Growth (compared to consensus) leads us to consider and balance this against asset performance in the ‘Gung ho’ regime (Growth and Liquidity higher, Inflation lower).” And while, we had the input variables and our forecasts almost 100% correct, the market ended up souring substantially after the CPI report in Mid July due to the turning tide in USDJPY. Thankfully we were well shielded via short metals and short USD positions.

The tone coming into August is somewhat the same. While a recession is nowhere to be seen in nowcasts and other higher frequency indicators, our models on ISM manufacturing suggest that manufacturing numbers will head lower in August as nowcast activity worsens slightly at the start of the month (though there is no reason to worry). This again places us in the ‘QE (Like)’ Regime – Growth lower, Inflation lower, and Liquidity higher. We forecast ISM Manufacturing at 46.6, Inflation at 2.8% YoY, and Liquidity at 1.3% MoM over the course of August.

In contrast to July, liquidity is now also a dark horse, with risks of liquidity worsening throughout August as the recent market turmoil forces money into the ON RRP facility. We are roughly in a 70/30 split between the August regime being ‘QE (Like)’ and ‘Down, Down, Down’ from the liquidity side. However, the growth side is becoming more tricky with more labor market data out. Initial Jobless Claims were not recessionary, and especially Texas claims have been revised down, which should provide some tailwinds for growth. We don’t necessarily see this as a bullet-proof indicator for higher ISM manufacturing, but we’ll keep an eye on the impact.

As always, let’s explore our rationale behind our forecasts for Growth, inflation, and liquidity before jumping to the allocation suggestions.

Growth – Improving, but July was weak

While the growth picture is FAR better than what markets are currently fearing, the signs from our nowcast suggest that growth is still not truly rebounding in August. Our congestion indicator is decreasing slightly at the start of August, but seasonally adjusted the picture is a bit more muddy (sideways to up marginally), and the Truck Market Index has yet to show signs of recovery. While there are no reasons to worry yet, the ISM manufacturing figure will likely stay around 46-47.

Chart 1.a: August congestion is sideways/up YoY, but still a bit muddy