GM. This is Milk Road Macro, the newsletter that’s here to remind you that it’s all fun and games until the new Fed Chairman says, “Good Afternoon.”
In our ongoing effort to bring you the most focused macro insights anywhere, we’re trying something new. In this newsletter, we lay out our updated macro outlook and give an overview of what’s driving markets this week. We’ve packed this with data-driven analysis so that after reading it, you’ll be equipped to navigate these volatile markets without getting a PhD in economics. Although you still want to get one, go for it.
And before we get going, while we’re on the subject of financial infrastructure…
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MILK ROAD MACRO ADVISES CAUTION
The technical term for markets this week is “Vibes are sus.”
MRMI is at -0.06, holding CAUTION and 75% exposure.
Source: Milk Road Macro Index
This puts us one data print away from tipping in either direction.
This is an unusual tipping point for our model. It shows the split we’ve been describing in the market for a while. Let’s break it down more to understand what’s driving this.
The economy pillar is providing a near-full tailwind. Even though the May inflation prints were super hot, year-over-year inflation is barely moving. The big surprise, though, was in the labor market. Per Friday's May jobs report, the labor market turned out to be quietly stronger than it looked, adding 172,000 new jobs.
To add a bit more nuance to this picture, most of May's job gains came from leisure and hospitality (70,000 jobs), local government (55,000 jobs), and health care (35,000 jobs).
I wish I could find a job doing leisure and enjoying hospitality for a living. Must be nice.
Okay, so if inflation is spiking, but steady in the long term, and the labor market is strong, why is the Milk Road Macro Indicator getting cautious?
Well, the drag is coming entirely from the market pillar.
Our Market Momentum Index landed at exactly +0.25. This follows two months of up-only price action.
Source: Milk Road Macro Index
What’s slowing the momentum? Financial conditions dropped -0.79 on the week to -0.11 as 10-year yields pushed past 4.53% and rate-hike odds repriced to 70% by year-end.
This means that despite inflation being steady over the past year, the market is worried it’s picking up again. The bond market is selling off. The Fed may have to hike rates. So the strong momentum that’s carried the market higher for two solid months seems to be slowing down.
It seems like Bank of America agrees with Milk Road on this. They just issued a warning to investors to exercise caution, too.
Side note: If you want the good stuff, you gotta join Milk Road PRO and hop into Discord with me. I answer macro questions day and night, and I even throw in a few memes and gifs now and then to spice things up. I promise you’ll like it. It’s just a buck, and it doesn’t suck! :D
What has stopped a deeper Momentum Index pullback is the equity market's composure: VIX at 18.80, high-yield spreads near 2.74%, and breadth still at +0.73 all show that volatility hasn’t exploded, breadth hasn’t collapsed, and borrowing hasn’t gotten too expensive because the market is too worried about risk. Yet.
Atlanta Fed GDPNow has slipped to 3.0% for Q2, and the Real Economy Score sits at -0.98, meaning the macro backdrop is stable but not strengthening, which is exactly why MRMI is parked just below the LONG line rather than above it.
Our call at this point boils down to a single unresolved question: Is the bond market right that growth is too strong for the Fed to stand down, or are equities right that the economy is resilient without being inflationary?
When will we get our answer? When will our Milk Road Macro Index tip bearish or back to bullish?
The June 10th CPI print should give us our answer. If it’s a tame reading, then the market holds the current regime and gives our Market Momentum Index room to recover toward LONG.
However, if we see the acceleration trend from May CPI continue, that would pressure financial conditions further, erode the macro buffer, and push MRMI deeper into CAUTION.
We’re going to be watching this CPI print like a hawk. Let’s hope that Kevin Warsh is watching it like a dove.
Get it? Cause Trump appointed him to be dovish? It’s a joke. Listen, they can’t all be bangers, alright.
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