Our strategic view on US macro is one of above trend growth and inflation risks. That said – we see risks of a counter trend snap richer in global fixed income for two reasons: firstly, our UST flow data suggests a step up in net duration buying intensity in recent sessions.
Source: Citadel Securities, May-26. Figures are for illustrative purposes only. Past performance figures do not guarantee future results.
Secondly – when we decompose changes in financial conditions using our sign restricted PCA – we can back out the drivers of cross asset price action into market implied growth and market implied policy factors. Collectively these factors explain about 75% of the variation in broad financial conditions. The valuation of our PC1 Growth factor suggests markets have largely internalized an above trend growth outlook, and risks appear skewed to the downside locally in terms of growth pricing. We think this is relevant for both fixed income and equity valuations, and lines up with our equity colleagues lean on flow fragility.
Cross Asset US Growth Pricing Appears Stretched
Principal Component Decomposition of US Financial Conditions: Growth Factor, 6m Z-Score
Source: Bloomberg, Citadel Securities, May-26. Figures are for illustrative purposes only. Past performance figures do not guarantee future results.
Our tactical outlook here should not be confused with our more fundamental outlook, which remains that the market may be underpricing the probability of a meaningful hiking cycle from the Fed.
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