QI PRO HOLY GRAIL DASHBOARD

QUICK QUILL — Opposing data brandished a bullish ISM Manufacturing New Orders-Inventories and a bearish ISM Services New Orders-Inventories simultaneously in May. Wall Street takes its cue from the former, but not the latter that’s flashing red. Opposing themes of higher-than-normal service inflation parallel lower-than-normal employment, challenging consensus views for this Friday’s Employment report. RCM/TIPP’s June Economic Optimism Index concurred as Investors turned pessimistic for the first time in two years despite the S&P 500’s rally. This last development keeps our caution flag raised for the consumer discretionary sector.

TAKEAWAYS

  1. The ISM Mfg New Orders-Inventories spread rose to 6.9 in May but the Services spread inverted to -5.2, flagging oversupply; this said, the tight relationship between ISM Services Inventory Sentiment and S&P Global Services Output Prices flags continued price pressures
  2. Both the ISM and S&P Global Services Employment indices fell below 48 in May, a 4th percentile event going back to 2009; the four non-COVID months where this occurred all saw declines in private core non-Mfg payrolls, countering May’s 85,000 NFP consensus
  3. Though the S&P 500 has risen roughly 10% since February, RCM/TIPP Economic Optimism for Investors fell 17.4% over the same time horizon vs. 10.7% for non-Investors; in fact, May’s print for Investors was the first below the neutral 50 level since June 2024

LONG MACRO

Recession probability to rise into 2025’s second half as private demand underperforms. The tariff shock should generate greater risks for a downshift in business investment and a more challenging environment for consumer cyclicals vis-à-vis consumer non-branded noncyclicals.

Manic shifts in U.S. politics harken first a deflationary gully to cross followed by the threat of impeachment and ultimately, a fourth change in administrations in as many U.S. presidential elections, a first in sequential terms since the precipice of the U.S. Civil War. The subsequent pendulum swing will manifest as Universal Basic Income/Modern Monetary Theory, and with it, the secular rise in inflation being prematurely predicted today by those positioned to profit from being short Treasuries.

Saturday Intelligence Briefing — 5.30.26

From oil to semiconductors to old-fashioned bond yields, we’ve come full circle. The “Iran War” now demands air quotes for traders. And the benchmark 10-year Treasury yield is now just 47 basis points (bps) from the Defcon 1 level that prompted sufficient angst inside the Beltway to prompt a response. The 13-week intermission since the 10-year closed at 3.96%, under the psychologically critical 4%-level, has been a cyclone. Aside from stocks disregarding all, what’s changed?

On Friday afternoon, Jamie Dimon spoke at the Reagan National Economic Forum. His message was not shocking but did serve as a reminder about the inevitability of credit cycles gone too far: “I do think when we have a credit cycle because there have been weakening standards in underwriting and transparency and marking, I do think you’ll see credit perform worse than people expect. That's all. I don’t think it’s systemic.”

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TACTICAL

RATES:

Short-end and Belly best opportunities for total return. Rally keys off weaker macro. Challenged private demand, higher unemployment and lower core inflation raise Fed rate cut probabilities.

Long-end holds at elevated levels with de facto caps at 4.5% for the 10-year & 5% for the long bond with the term premium supported by fiscal malfeasance exacerbated by falling sovereign revenues and despite diminishing stimulus to the U.S. consumer.

Curve view – Bull steepener in 2025’s second half.

USD:

A sidelined Fed contrasting with most global central banks easing catalyzed a selloff in the greenback. A Fed forced to play catchup could easily thin the massively crowded trade, especially as global trade weakness impairs an open global economy vs. its closed U.S. counterpart.

CREDIT:

•  Underweight HY, overweight strong cash-flow IG

•  Lower-rated buckets at risk of dispersion with Fed Higher for Longer

•  Jobless claims deterioration makes a cautious Street rethink already-wider-spreads 2025 expectations, i.e., up default estimates as bankruptcy cycle speeds up and size

•  Fitch’s acknowledgement of cyclical consumer sector “deteriorating” fits this view

EQUITIES:

OW     Utilities
OW     Fossil Fuel Energy
OW     Senior Living

UW     Consumer Staples
UW     Consumer Discretionary
UW     Large & Midsize Banks

OTHER ASSETS:

•  USD view supports UW commodities & EM

•  Oil is a different story with geopolitical risk ramping (Israel v Iran)

•  Long MOVE to capitalize on runaway lending to Nondepository Financial Institutions triggering a credit event