Cyclical assets have seen material tailwinds lately due to strong USD liquidity trends, but the actual cyclicality in the economy so far has failed to deliver. Manufacturing PMIs have been hesitant to confirm the cyclicals / defensives ratio seen in equity space and the value is probably titled in the other direction given for example the forward-looking component in the Empire Fed survey.

A good example of a sector that is running on liquidity fumes is “Consumer Discretionary” and we struggle to see why discretionary demand should keep up pace into Q1 should the excess savings be depleted as expected.

We are not keen on being outright short as the USD liquidity continues to provide ample signals as the ON RRP is emptied faster (liquidity adding) than the QT program can withdraw liquidity. Instead, we find a smarter way to exploit the spread.

Chart 1: Have cyclicals run too hot?