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Now, we’re still in a risk-on environment - but there are a number of things to watch carefully.
We’ll look at liquidity, financial conditions, the business cycle, the US economy, the Federal Reserve and positioning.
This is about taking a very high-level view of what’s happening and what might happen next.
We’ve got more than 40 important charts to get through - so let’s get going…
LIQUIDITY
When looking at liquidity, the most important thing for me is always the dollar, as measured by the Dollar Index ($DXY).
The dollar is incredibly important for the overall liquidity picture globally.
The $DXY had been weakening significantly through the first half of this year, acting as a strong driver for global liquidity and asset prices.
However, I have been flagging for some time in the macro newsletters that the dollar was due for a period of upward correction/consolidation.
This was due to:
- Extremely bearish dollar sentiment and positioning that probably needs to be “shaken out”
- The ongoing $500bn rebuild of the Treasury General Account (TGA) - which is generally dollar bullish (I explained this in detail here)
This upward correction/consolidation period is now playing out.
From a technical perspective, the $DXY has now conclusively broken its downward trend.
I do still think that the dollar is likely in a structural downtrend for a variety of reasons, and this current upswing is likely to be just a correction.
But it’s hard to predict how long this “positioning shake-out” might last - it’s possible it has already finished.
The TGA rebuild will likely last until roughly late September, putting upward pressure on the $DXY while it is ongoing.
Bearish futures positioning on the dollar has begun to unwind in a big way as the dollar has corrected upwards in recent weeks.
But a recent Bank of America FX survey for August still puts “short USD” as “the most crowded trade”.
My hunch is that more of this bearish dollar sentiment probably needs to be burned off before there’s any potential further downside for the $DXY.
The reason this is important is because the $DXY generally has an inverse relationship with risk assets, often on a lag of between 1 to 3 months.
(The $DXY goes down → risk assets go up 1-3 months later.)
In my previous Macro PRO report in late June, I highlighted an inverse 3-month $DXY percentage change chart that was pointing towards an incredibly bullish picture for risk assets.
It was indeed bullish, but now the picture is less certain, as the dollar has started to consolidate, dragging the inverse 3-month percentage change chart down.
It’s not necessarily a bad picture here just yet - but it’s looking less bullish than eight weeks ago.
Here’s the current picture for bitcoin:
And here’s the current picture for the S&P 500:
Ideally, a risk asset bull would want to see this current $DXY correction finish soon and the structural $DXY downtrend continue.
The longer this $DXY correction lasts and/or the higher it corrects, the more pressure it is likely to put on risk asset markets over time.
For me, this is the most important thing to watch on a medium-term time horizon.
For now, the long-term dollar-denominated “global M2 money supply” cycle is still looking constructive.
The upswing that began in late 2022 is continuing - but there’s no doubt we are now likely in the later stages of the cycle, based on the length of previous cycles.
Below you can see it overlaid with S&P 500 year-on-year percentage change.
And here it is overlaid with bitcoin year-on-year percentage change.
We are seeing an ongoing dollar liquidity squeeze as the Treasury General Account (TGA) balance has risen by $200bn in recent weeks (liquidity drain).
It had been falling earlier this year (liquidity injection), as the US Government was using its “savings” (TGA) to fund spending, pushing “new” dollar liquidity into markets (this was due to dynamics around the Government’s debt ceiling).
But a new debt ceiling agreement was reached in July - and now the TGA is being rebuilt back up to the Treasury’s target of $850bn.
This will last until roughly late September and will be a roughly $500bn total dollar liquidity drain as money shifts from markets back into the TGA (roughly $300bn more to go).
I explained this in more detail here.
This TGA rebuild is generally bullish for the value of dollar ($DXY), all else being equal, as dollar liquidity is being sucked away from markets.
The People’s Bank of China (PBoC) - the central bank of China - is continuing to inject huge amounts of liquidity into Chinese money markets.
In December 2024, the PBoC made a rare move by officially changing its monetary policy stance from "prudent" to "moderately loose".
Since then, the PBoC has injected more than 8 trillion RMB (more than $1 trillion USD) into Chinese money markets, according to Crossborder Capital.
China is integral to “setting the tempo” of the global economy - so Chinese stimulus is generally good news for the world economy as a whole.
The Chinese economy had been deteriorating rapidly through 2023 and 2024, and this can be seen through a concerning slide in Chinese Government bond yields (I think this is a big reason why measures of global economic health have remained stubbornly low for some time).
But 10-year Chinese bond yields have now stopped falling, and started to curl upwards - a potential indication of an improving Chinese economy.
If China can drag itself out of its economic malaise (remains to be seen), this would be a big boost to the world economy and the global business cycle.
Thankfully, credit impulse in China is showing promising signs.
This tracks the change in the amount of new credit being issued in China - measuring how quickly credit is growing or shrinking in relation to the overall economy.
It’s sitting at its highest level since 2021.
Back in the US, private liquidity creation is expanding - the credit cycle is booming, with bank credit (all commercial banks) growing at a strong clip.
It’s a similar story with total bank assets (all commercial banks).
Liquidity is also still being bolstered on an ongoing basis by a continuation of “Yellen-omics”.
The US Treasury is topping up the Government’s growing debt refinancing needs with highly liquid, stimulative bills.
I explained this in more detail here.
So, liquidity growth is generally looking solid overall.
But, as I’ve mentioned, the dollar is the most important to watch over the coming months.
Now, let’s take a look at financial conditions.
FINANCIAL CONDITIONS
Financial conditions are still loosening considerably (bullish).
My Financial Conditions Index is continuing to fall (loosen), after it rose (tightened) significantly in March and April amid the tariff chaos.
It’s currently comfortably in green territory (below zero) and has been since late May.
We are back to the same levels of relative “looseness” that helped to push risk asset markets higher through large parts of 2023 and 2024, according to this index.
Green conditions have historically led to strong performance for risk assets.
For example, here is the index overlaid with the S&P 500:
And here is the index overlaid with bitcoin:
Another measure of overall financial conditions, the Chicago Fed’s National Financial Conditions Index (which includes more than 100 separate inputs), is also loosening (falling) rapidly.
This measure is back to the “peak speculation” levels of 2017 and 2020/2021 (you might be familiar with these years in relation to bitcoin and other cryptocurrencies).
There’s no reason it can’t move lower from here (loosen further), according to historical precedent - as it’s not looking particularly “stretched” yet.
If this index continues to generally drip downwards, the bull market continues, and speculation will likely accelerate.
Next, let’s look at the business cycle, another crucial element driving asset markets.
WHERE ARE WE IN THE BUSINESS CYCLE?
The business cycle has been largely lifeless in recent years, if we look at the ISM Manufacturing PMI (Purchasing Managers Index).
It’s not following the neat and predictable cycles that we have seen in previous years, making it difficult to assess exactly where we are in the business cycle.
This continued in July, with a disappointing PMI print of 48 (meaning the manufacturing sector is still in “contraction” - below 50).
While this might seem “bad”, history shows that the PMI printing a low number is not a time to be bearish (if you have a medium to long term investing time horizon).
The PMI printing 48 or lower is a time to be bullish.
Historically, a PMI reading of 48 or lower has seen the S&P 500 perform strongly during the following year, with a median gain of more than 20%.
In a recent macro newsletter I made the case that the PMI is looking ready to move higher in the second half of 2025.
This hasn’t started happening yet.
But nothing has really changed from my views in that newsletter.
I’m still expecting the PMI to move higher in the second half of 2025 (this is bullish for risk assets).
As discussed above, a strengthening Chinese economy would be a big help towards firing up the global business cycle.
We have had some promising regional Fed manufacturing surveys for July and August (so far).
A composite of these regional Fed surveys shows an uptick - but this hasn’t been followed by an uptick in the main PMI measure…yet.
(Regional Fed survey measures are a more localized view of manufacturing activity in certain parts of the US - they generally move closely with the main PMI)
The Fed’s Industrial Production Index has also been looking constructive in recent months.
A year-over-year chart of Industrial Production shows a strong correlation to the PMI and is currently pointing towards a higher print.
My Global Economy Index (GEI), another business cycle measure that I track, is also looking quite good.
This index features currencies, bond yields, commodity prices and freight rates (shipping costs).
GEI signaled that we might have seen some kind of weird and underwhelming “mini cycle” between late 2022 and early 2025, which may explain why traditional PMI measures have remained stubbornly low for so long.
But it’s now bouncing back strongly, and is looking more similar to previous cycles.
This measure has historically been a decent leading indicator for risk asset moves.
Here, I’ve advanced it forward by three months and overlaid it with S&P 500 year-on-year percentage change:
Here, I’ve advanced it forward by three months and overlaid it with bitcoin year-on-year percentage change:
A strong upturn in the PMI is a bullish sign for risk assets overall.
But, in particular, it’s an environment where capital historically shifts along the risk curve - which means it’s even better news for smaller, more speculative equities, particularly those in emerging industries, and altcoins.
But markets will generally move in advance of lagging survey data like the PMI.
We can see this if we look at ARKK/SPX.
ARKK (an ETF focused on "disruptive technology” within US equities) relative to the S&P 500 (broad large-cap US equities).
And then shift it forward by three months.
I still think it’s likely we see an upturn in the PMI in the second half of 2025.
Now, let’s take a deeper look at the US economy.
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WHAT’S LEFT INSIDE? 👀
- We take the US economy’s temperature and look for any points of concern
- What economic warning signs to look out for in the second half of 2025
- How the market is currently positioned
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