Global Macro Monitor

We have incorporated several AI-focused ETFs into our equity table.

Additionally, observe the trend in financial conditions as indicated by the Chicago Fed’s National Financial Conditions Index, detailed in the commodities table. The index’s current reading of -0.53 – measured on March 15 and should be a few points easier for March 22, given this week’s market performance –  signifies the easiest financial conditions since January 2022, a few months prior to the Fed’s interest rate hikes were initiated in March 2022. These lenient monetary conditions are facilitating economic performance that is consistently surprising to the upside,  and allowing financial assets to rip.

This dynamism complicates the Fed’s job. Market anticipation continues to revolve around the first rate cut, but given the prevailing financial conditions, the wait is likely to continue.   

Waiting on Jay Po?   Prepare to keep waiting. 

The diverging relationship between economic performance and political success in the U.S. highlights a shift from the past, where a strong economy positively impacted incumbent approval ratings. President Biden’s approval ratings remain unaffected despite recent economic improvements, suggesting a decoupling of economic sentiment and political fortunes. This phenomenon, which contrasts with stable economic-political linkages in Europe, is attributed to the U.S.’s heightened partisan divide, where political allegiance increasingly dictates economic perception, challenging the traditional belief that “It’s the economy, stupid” in American politics.

Key Points:

• President Clinton’s political advisor, James Carville, highlighted the economy’s role in political success during 1992 presidential campaign with assertion, “It’s the economy, stupid.”
• Voter sentiment has traditionally linked to economic performance, affecting incumbent party success.
• Recent trends show a disconnect between the U.S. economy’s health and President Biden’s approval ratings.
• The COVID-19 pandemic and inflation crisis may have influenced this anomaly, yet the shift predates these events.
• Research indicates a decoupling of economic sentiment and presidential approval in the U.S. since Obama’s tenure.
• This phenomenon seems unique to the U.S., with European governments’ popularity still tied to economic conditions.
• U.S. political polarization may explain the decoupling, with partisan views influencing economic perceptions.
• Studies suggest that political biases skew individual economic assessments (confirmation bias) impacting presidential approval.
• The current U.S. political climate suggests economic policy impact on electoral decisions is diminishing.
• Contrasts with Europe, where economic sentiment is more uniform across political lines, suggesting a more rational political-economic relationship.

Source: Financial Times

A Bloomberg article from this morning offered an excellent array of charts detailing the shifts in interest payment flows amid rising rates. The historical anomaly was both surprising and contradicted our priors.

10 Key Points:

1. Historical Anomaly: This is the first time in the last fifty years that a Federal Reserve rate hike cycle has led to a significant drop in household net interest income.
2. Interest Expense Increase: Since the Fed began raising rates in March 2022, Americans’ annual interest expenses on debts like mortgages and credit cards have surged by nearly $420 billion.
3. Interest Income Lag: The increase in interest income during the same period was only about $280 billion, resulting in a net decline in household interest income, a departure from past trends.
4. Consumer Debt Influence: The recent rate hikes impacted household finances more because of a higher proportion of consumer credit, which adjusts more quickly to rate changes, increasing interest costs.
5. Banks and Savers: Banks have been slow to pass on higher interest rates to depositors, and the prolonged period of low rates before 2022 may have discouraged savers from actively seeking better returns.
6. Shift in Wealth: There’s been a shift from interest-bearing assets to stocks, with dividends surpassing interest payments as a source of unearned income during the pandemic.
7. Distributional Discrepancy: Higher interest rates benefit wealthier individuals who own interest-earning assets, whereas lower-income earners face the brunt of increased debt servicing costs, exacerbating economic inequality.
8. Job Market Impact: Typically, Fed rate hikes affect households through the job market, as businesses cut costs, potentially leading to layoffs or wage suppression, though this hasn’t occurred yet in the current cycle.
9. Economic Impact: The distribution of interest income and debt servicing means that rate increases transfer money from those more likely to spend (and thus stimulate the economy) to those less likely to increase consumption, potentially dampening economic activity.
10. No Immediate Relief: Expectations for the Fed to reduce rates have diminished, indicating that high-interest expenses for households may persist.

We are putting ChatGPT to the test here, and we shall know the results by market close tomorrow.

We prompted ChatGPT with the following:

What is the most pervasive pattern to predict a less than -1.0 % Daily Change.

ChatGPT came back with:

The most pervasive pattern before a daily change of less than -1% seems to involve negative changes in the days leading up to the significant drop. On average:

• The day before the drop, the daily change was approximately -0.11%.
• Two days before the drop, the daily change was approximately -0.05%.
• Three days before the drop, the daily change was approximately -0.05%.

We interpret this as three small down days before a 1 percent flop.  Given last week’s close in the S&P (the data we used was the S&P500 daily change) of:

Wednesday:  -0.19 percent
Thursday:     -0.29 percent
Friday:         -0.65 percent

the market is set up for a 1 percent down move according to the data and ChatGPT’s analytical capacity or pattern recognition.

No guarantees and beware of hallucinations.

Place your bets and stay tuned, folks.

COTD: Chart of the Day

Elizabeth Economy is good.  She is a distinguished figure in international affairs, specializing in Chinese policy. She holds a senior fellowship at the Hoover Institution, Stanford University, and has previously advised on China for the Department of Commerce. Economy’s expertise is rooted in her tenure at the Council on Foreign Relations and her extensive authorship, including books like “The World According to China” and “The Third Revolution.” Her work has garnered significant recognition, including a shortlist for the Lionel Gelber Prize. Economy has contributed to academic and policy discourse through numerous publications and has been an influential voice in media and government circles. Her educational background includes degrees from Swarthmore College, Stanford University, and the University of Michigan.