Why the MRMI stays at CAUTION despite ISM at 55.6%

GM. This is Milk Road, the newsletter that once a week turns in a macro update that knows that nothing will create situational awareness like a margin call on your wedding day.

Here’s what we’ve got for you today:

✍️ I repeat: proceed with caution.
✍️ Out of breadth.
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I REPEAT: PROCEED WITH CAUTION

The headline allocation posture of the Milk Road Macro Index is at -0.16, CAUTION, 75% exposure.

Source: Milk Road Macro Index

Our indicator has been holding at CAUTION a lot lately despite the strongest cross-pillar growth alignment in weeks.

Why!?

Settle down, I just got started. You gotta read the rest of the letter.

July ISM Manufacturing printed 55.6%, best since May 2022, and answered last week's central question in the clearest possible way.

GDPNow's Q3 estimate extended from 5.0% to 6.2% rather than retracing, the real economy score moved from -0.08 to +0.07, and the stress score dropped to its floor at +0.00 with the macro buffer at full strength at +0.50.

This all paints a really strong picture from the economy side of things, but what about the market?

The market side tells the same story: growth impulses moved up +0.27 on the week.

Oil held below $80, copper rose, freight costs fell, and the yield curve steepened. All of this happened while financial conditions at +0.31 absorbed the Fed's divided hold and the July jobs miss without flinching.

I know I just covered a lot of stuff really fast, but the gist of it is, the market is holding up really well.

The two pillars, the economy and the market, now seem to agree on growth. The divergence that has kept the Milk Road Macro Index in CAUTION is resolved.

SO, WHY IS IT STILL IN CAUTION!? (I put this in all caps to express frustration. I am a very creative literary master. No AI could have come up with that idea.)

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OUT OF BREADTH

I regret to inform you that it seems to be because breadth on the market side fell -0.46 on the week to +0.18 and is working directly against every other gain.

Even as the equal-weight S&P 500 continues to outrun the cap-weighted index and sector rotation carries into August. The rotation is visible in the market, but the breadth score still isn't registering it, and that gap is the only thing keeping the posture from going full RISK ON.

Source: Milk Road Macro Index

ROUGH.

Okay, so how does this play out?

There are three things I’d like to see happen that I think would clear the way back to RISK ON.

First, not to be too obvious, but breadth stops declining and reflects the rotation signal.

Next, watch the payroll data on August 7th. Consensus 91,000 to 120,000 after June's 57,000 miss. This would confirm the ISM surge has a labor market underneath it. Which in fact does still matter until AI makes all jobs obsolete (I hope lol).

Third, CPI on August 12th leaves the six-month core CPI direction flat, because ISM Prices Paid at 71.1, still historically elevated from tariff-driven input costs, is an active pipeline warning that could turn the inflation axis positive and build stress fast if it starts bleeding through.

Sorry, that’s a lot of macro jargon. What I am saying is, we need inflation not to spike up again and ruin things for everyone. The CPI on August 12th is the thing to watch for that.

So, that’s the story for this week.

The economy and the market seem to be aligned in a bullish direction.

However, before we get the all-clear to go full RISK ON, we need to see market breadth pick up, the labor market show support, and inflation not to ruin the party by blowing out or blowing up or generally blowing.

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Until next time, stay safe, stay educated, and stay bullish!

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