When Growth Wobbles and Inflation Holds: What Comes Next?

Growth

Markets are celebrating fresh highs, but beneath the surface, the seeds of the next phase may already be forming. Over the past several weeks, price action has been relentless, with nearly every major index pushing into uncharted territory, including small caps (IWM), which often serve as a litmus test for broad market strength. Yet even in this environment of apparent momentum, subtle cracks in growth impulses are beginning to emerge. These early signals don’t yet warrant alarm, but they should heighten your awareness. What matters now is whether price confirms these shifts: will the current regime of easy new highs continue, or are we approaching an inflection point where the door to consolidation quietly opens?

While growth impulses may not slow, it's important to have price confirm what we're seeing in the data. The Nasdaq (QQQ) needs to hold the $590 (mid VAMP gray line) level for momentum to remain intact. If we lose that level, then the doors open for deeper consolidation. If that happens, you need to mentally prepare yourself for the possibility of seeing $577 (lower VAMP green line).

On the other hand, Bitcoin has not shown the same strength as the Nasdaq, with price again back below $114k (mid VAMP gray line). This may be a leading indicator of softness in growth impulses we're seeing ahead. Bitcoin below mid VAMP will only lead to further consolidation, and even possibly a bearish trend if we cannot hold $109k (momo orange line). For Bitcoin to finally move, we're going to need to hold a move above mid VAMP. Only then will the doors be open for much higher. As of now, we're back in the consolidation phase, and big moves just aren't expected. Keep leverage and big size tight here, as this zone is notorious for chop.

Inflation

While we discussed the possibility of softness in growth impulses, we are actually seeing the complete opposite with inflation. Inflation impulses have seen a strong move over the last few months, which is evident in our System reading on the QuantBase. With the possibility of softness in growth impulses, inflation impulses do seem more resilient. On the surface, simply looking at long-term inflation swaps gives the expectation of resiliency as they have not fallen from their local highs, despite all the bearish narratives around labor.

Another area of concern is commodities, and a simple commodities basket (GSG) is on the verge of breaking up rather than down. In an environment where liquidity impulses have gotten accommodative to support a weakening labor market, this is the last thing you want to see as a potential risk to the other side of the Fed's mandate. Expect inflation expectations to rise materially if GSG can sustain a breakout and move higher. If this were to materialize with softer growth impulses, it would likely lead to a period of consolidation in risk assets.

Liquidity

Since the FOMC last week, the market has rallied nearly 2.5% before pulling back slightly this week. Some notable details of the current impulses show the Fed is moderately accommodative, with positive impulses. However, we have yet ot actually see impulses breach their highs from earlier this year, which in our opinion, would be a signal that looser conditions are accelerating. Instead, we're just seeing status quo on central bank impulses at the moment.

Positioning