Macro Triangulation

📚 Methodology & Analysis Guide

We triangulate the true inflation trajectory using three distinct data layers to identify market mispricing. To form a complete macro view, analyze the layers in the following sequence:

1. Fed Decision Engine & Probability Math

The core Fed Action Probability scores are driven by the WCS (Weighted Condition Score), calculated systematically from the triangulation layers to map directly into Hike, Hold, and Cut probabilities. The model employs several critical hard-coded overrides:

• Geopolitical Supply Shock Override: Triggered when Brent Crude > $90 and ISM Services Prices Paid > 60. This reflects a structural, non-interest-rate-sensitive bout of inflation, pushing hike probabilities upward regardless of real economy deterioration.
• The Sahm Rule Override: When unemployment rises ≥ 0.5 percentage points over its 3-month moving average low, a hard cutoff caps Fed hesitation, forcing P(Cut) to a minimum of 70%, completely overriding the standard WCS matrix parameters.

2. The Immediate Trade (Consensus vs. Model)

This tracks the nearest upcoming official release. We use a proprietary bridging calculation to estimate Core PCE ahead of time.

• Estimated Core PCE (Bridged): Calculates the Fed's preferred metric early by swapping out CPI medical and financial components for their PPI equivalents (averaging Physician care and Hospital outpatient care, alongside Portfolio Management).
• Signal Analysis: If the Bridged Model diverges significantly from Street Consensus, the market is mispriced.

3. The Real Economy (Pipeline & Services)

This layer validates whether the immediate trade signal is a short-term anomaly or a structural trend.

• Producer Price Index (PPI) & Manheim: Tracks wholesale and goods inflation before it reaches the consumer.
• ISM Services Prices Paid: A leading proxy for "Supercore" inflation. It measures the breadth of price increases among service providers.
• Zillow Observed Rent Index (ZORI YoY): A 6-to-9 month leading indicator for the official CPI Shelter component. Because Shelter is heavily weighted in inflation metrics, a falling ZORI YoY trajectory guarantees future disinflationary pressure.
• Labor Market (ADP/Claims): Acts as a leading indicator for Supercore services inflation. A tightening labor market (falling claims, rising payrolls) signals persistent wage pressure, while a loosening labor market signals future disinflation.
• Signal Analysis: If the top table signals COLD, but ISM Prices Paid is HOT and ZORI is accelerating, the COLD signal is likely a head-fake. Pipeline pressures remain high.

4. Expectations & Positioning (Smart Money)

This layer shows where capital is actually deployed.

• CME Implied Fed Rate: Tracks 30-Day Fed Funds Futures to see immediate rate expectations.
• 5-Year Breakeven (T5YIE): Measures the bond market's long-term inflation belief.
• Signal Analysis: If our Real Economy metrics flash HOT, but Breakevens are dropping and Futures are pricing in cuts, the market is severely offside, creating a high-probability contrarian setup.

📊 Indicator Logic & Signal Taxonomy

Primary Setup Signals (Divergence)

• 🔥 Hot Setup (Bearish): Model > Consensus (>= +0.05%). Signals upside inflation risk; bearish for bonds/equities.
• ❄️ Cold Setup (Bullish): Model < Consensus (<= -0.05%). Signals downside inflation risk; bullish for bonds/equities.
• 😐 Flat: Divergence is between -0.04% and +0.04%. Market is efficiently priced.

Real Economy Signals

• ISM Services Prices Paid:
  • 🔥 Hot: Index > 55.0 (Broad service inflation expanding)
  • ❄️ Cold: Index < 50.0 (Service prices contracting)
  • 😐 Flat: Index between 50.0 and 55.0 (Neutral/Trend)
• ZORI (Shelter Lead):
  • 🔥 Hot: Current YoY % increases by more than 0.10% vs Previous YoY %
  • ❄️ Cold: Current YoY % decreases by more than 0.10% vs Previous YoY %
  • 😐 Flat: YoY % change is within ±0.10% of Previous month
• Labor Market (Claims):
  • 🔥 Hot: 4-Week Claims MA falls by > 2K (Labor market tightening)
  • ❄️ Cold: 4-Week Claims MA rises by > 2K (Labor market loosening)
  • 😐 Flat: 4-Week Claims MA change is within ±2K

📚 Definitions

• CPI (Consumer Price Index): Measures average change in prices paid by consumers. The 'Headline' number.
• Core CPI: CPI excluding volatile food and energy prices.
• Estimated Core PCE (Bridged): A proprietary calculation that bridges the gap between CPI and PCE by swapping out CPI medical and financial components for their PPI equivalents. Provides an early read on the Fed's preferred metric.
• PCE (Personal Consumption Expenditures): The Fed's preferred inflation gauge, adjusting for consumer substitution behavior.
• Core PCE: PCE excluding food and energy. The primary metric for the Fed's 2% target.
• PPI (Producer Price Index): Tracks inflation at the wholesale level.
• ISM Services Prices Paid: A diffusion index measuring price increases for service providers. Acts as a leading proxy for "Supercore" inflation.
• ZORI (Zillow Observed Rent Index): Measures year-over-year changes in asking rents for new leases. Acts as a 6-to-9 month leading indicator for the official CPI Shelter component.
• ADP Monthly Added: The absolute number of private-sector payrolls added in the previous month.
• ADP Wage Growth: The year-over-year percentage change in wages for job-stayers.
• 4-Week Claims MA: The four-week moving average of initial jobless claims, indicating real-time momentum in the labor market.

📎 Sources

• U.S. Bureau of Labor Statistics (CPI, PPI).
• CME Group FedWatch Tool (Smart Money).
• Federal Reserve Bank of St. Louis (FRED) (Breakevens).
• Institute for Supply Management (ISM Services).
• Zillow Research (ZORI).
• ADP Research Institute (Payrolls, Wage Growth).
• U.S. Department of Labor (Jobless Claims).