Hello everyone, and welcome back to our weekly positioning watch.

A lot is happening in markets ahead of what could be a significant turning point in sentiment, with the August CPI report landing in our inboxes at 14:30 CPH time. The debate between Harris and Trump seems to have set the tone in markets leading up to the event, with the USD selling off as markets agree that Trump is likely the more bullish of the two on USD.

As we approach the CPI report, our positioning gauges across asset classes are starting to align. Markets are increasingly leaning into defensive/safe-haven assets while reducing USD exposure. It certainly seems like markets are positioned for a soft print. This implies that the risk/reward could be better in betting on a slightly higher-than-expected print since it would take a very soft print to extend the trends we’ve seen in rates, FX, and equities.

Defensives continue to receive the most attention from macro hedge funds and CTAs, with utilities, consumer staples, and healthcare leading the pack. These sectors perform well if growth weakens further and rates fall. In contrast, no one seems to want exposure to energy, given the recent price action in oil and inflation expectations.

Exposure has been broadly reduced in most cyclical equity sectors ahead of the CPI release, which ironically suggests that even a slightly hotter print could lure markets back into growth rebound trades, as the inflation focus has shifted from supply-side to demand-side factors. A soft print, therefore, is not necessarily positive news for equities, while a slightly hotter print might provide relief to sectors like materials, industrials, and consumer discretionary.

Chart 1.a: Equities Are Positioned for a Soft Print