Half-time Report July 14th 2023

As we bid farewell to the first half of the year, the month of July has greeted us with successive displays of fireworks, captivating audiences for two consecutive weeks now. During this time, the talking heads of the Bank of England (BOE), Bank of Japan (BOJ), European Central Bank (ECB), and Federal Reserve (Fed) met in Sintra, Portugal where they expressed unanimous agreement that consumers in these major economies remain strong, resilient and employed, hence, showing no evident signs of an impending recession (minor awkward silence from BOE’s Andrew Baily during this part of the conversation). Overall, the messaging was consistent across the board: ”core inflation remains elevated but data dependency is key for an accurate assessment of the true state of the economy and further evidence is needed to determine the trickle down impact of aggressive rate hiking by all central banks” (excluding Japan which is not part of the herd and has become the poster child economy amongst academics).

In alignment with their priority of controlling inflation to the “unchangeable” 2% target long-run level, the consensus amongst policy makers was that the risks of a severe recession are minimal, in spite of some necessary cooling measures.

Shortly thereafter, the US proceeded to set off a series of bottle rockets of its own during the shortened 4th of July holiday after releasing the second weakest non-farm payrolls (NFP) report since June 2021. Additionally, June’s Consumer Price Index (CPI) came in softer than anticipated this week, currently standing at a 3% year-over-year rate. The softer data is supportive of the FEDS inflation mandate and suggests we are one step closer to the end of their tightening cycle. Needless to say, risk assets globally were highly appreciative and fueled a strong catch-up rally. With front end rates already pricing in another 2023 hike, J. Powell is being given ample maneuvering room into the next rate decision.

We highlighted the degree of dislocation in risk assets over the past few months, well, the last 10 trading sessions have been further supported by a much awaited index rebalancing, where lagging sectors of the economy and most major indices (non mega tech) have normalized. However, the thin summer liquidity and a lack of price sensitivity by these funds has reverberated most left behind areas of the market, this time, finally…to the upside. Absent of news, those returning from summer breaks and who have been sitting on the market sidelines will be in for a surprise.

** Commentary from RCG Portfolio Managers
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** Dynamic Macro Strategy
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This strategy relies on historical data and quantitative techniques to detect statistical disparities and make predictions in global markets through liquid ETF’s.

“Our short term tactical positioning has performed well on the back of recent index rebalancing. Many areas of the market, particularly in the US region were severely dislocated and that correction was due to occur. We remain cautious during these summer months but anticipate this momentum to carry forward as long as no major surprises in economic reports appear. As US rates fall, we expect further weakness in the dollar versus other major currencies and will be looking to swap richer US sector exposures for lagging regionals in the coming months.” – Nick Diaz

** Inflection Strategy
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The strategy takes positions in highly out of favor US equities which we believe are inflecting due to changing fundamentals/events.

“After a tough first half of the year we finally began to witness a recovery in both energy and small cap stocks. The Russell 2000 is up 3.2% on the month, 11.4% on the year and should continue to gather strength in the second half. With no changes to current selections in the portfolio over the past few weeks, we believe this strategy is well positioned for this environment and are closely monitoring other names and target entry levels to increase exposures where suitable”- Stefan Lingmerth

** Safe Haven Strategy
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This strategy protects capital during inflationary environments and seeks to maximize yield using fixed income instruments and defensive assets.

“With inflation seemingly on the right path, yields have and should continue to trade in less erratic manner as fixed income traders begin to extend duration in their books. Late last week, we upsized our weight and were lifting 2yr paper at over 5% as markets overextended themselves well beyond our fair value model for this point of the curve. Since then, the move was sharply reversed after further data with 2yr closing near 4.65%. We continue to seek normalization further out on the curve s term premia slowly re-emerges.” – Nick Diaz