Attack the Week (ATW)

Reflection to Visualisation

Sunday Thoughts

I’m now fully back in my seat after enjoying some quality time off to unwind and reflect. When I'm away, I am fascinated by how nature unfolds around me. Every single day, I was witnessing a tortoise come around the grass at the same time, and a bunch of birds sitting on a tree branch at the same time before sunset. Those animals are living life purely on instinct, reacting to their environment through sensory cues and evolved behaviours rather than visualising complex future scenarios.

We humans, by contrast, possess the unique power of visualisation. We can imagine events that haven’t happened, plan far ahead, and mentally rehearse complex outcomes. This ability underpins everything from building a sand castle to trading financial markets. But it is also a potential downfall. Poorly disciplined visualisation can lead to paralysis, fear of unlikely outcomes, or emotionally driven overreaction.

Source: Dall-E

Much of macro trading is about imagining possible scenarios of the world three to six months out. That is easier said than done. It requires a framework for analysing, but also a healthy contrarian mindset, which is probably the hardest part. I will use another post, written by Macro D, which dissects the similarities between macro risk-taking and philosophy, discussing many aspects of forward thinking and deep analysis.

Following is one macro visualisation I am currently contemplating:

• Rate markets still anticipate a rate-cutting cycle, albeit a shallow one for the Fed. What if we find ourselves at the same Fed Fund rate by December? What will the curve look like, and where would 2-year yields be? I can see scenarios where we are pricing out further cuts entirely. In such a vision, there are still very attractive STIR trades that pin SOFR rates, where one can construct attractive fly structures that benefit from such an outcome. I shall discuss those types of trades in another post.

US 1y1y OIS

For now, we are still beholden to the instinctive nature of markets as we react to the political soap opera unfolding. US NFP surprised to the upside again, with unemployment at 4.2%. Focus now shifts to CPI this week, where a slight pick-up is expected. The bigger risk is CPI beats and 2y yields break previous highs.

Below are additional thoughts from Macro D on the current state of US and global debt dynamics, before we scan the weekly macro calendar, and update the weekly asset allocation model for its latest change and performance.

Wishing you all a successful week ahead!