AXIOMA ROOF™ SCORE HIGHLIGHTS

For several weeks, bond investors had been pricing the risk that the Fed was falling behind inflation again. Last week, that concern finally reached equity investors, overwhelming even their enthusiasm for AI. Oil and gas prices rose as renewed hostilities in the Gulf and continued attacks on Russian energy infrastructure revived inflation concerns, while investors parsed employment, consumer-price and producer-price data ahead of this week’s FOMC meeting. As always, macro data is generous with its hints but cheap on specifics. Still, the releases largely pointed in the same direction: inflation is proving less cooperative than central bankers would prefer. Whether the Fed responds with sufficient urgency is this week’s big question.

That uncertainty helps explain why aggregate sentiment among investors across the ten markets we track remained neutral and little changed over the past week, despite having improved materially from negative over the past month. The broader trend remains a recovery from the more defensive positioning seen during the summer, but last week’s pause suggests investors are reluctant to extend it before hearing from policymakers. The composition of sentiment has nevertheless improved materially over the past month. Five markets now sit in neutral territory and two are positive, compared with only three neutral markets and no positive ones a month ago. Investors have become less defensive, without becoming much more convinced.

The distinction matters. Sentiment is an appetite, not an opinion. Investors can spend an entire week discussing geopolitical risks, inflation fears and central-bank credibility, then fund positions suggesting that those concerns remain manageable. ROOF measures the funded conviction rather than the conversation. On that score, investors have cautiously re-engaged with risk over the past month, particularly in the US, Emerging Markets and APAC ex-Japan. Yet caution remains visible in the distribution of sentiment. Sentiment among both Chinese and European developed-market investors remains bearish, with Chinese investors displaying the stronger preference for safety. Between them sits a large group whose sentiment is balanced, but lacks direction. Five neutral readings represent neither confidence nor fear. They describe investors waiting to discover which one deserves their money.

Cross-market dispersion narrowed sharply last week, falling from the 67th percentile of its history to the 38th. Investors still disagree on the appropriate level of risk across regions, but their sentiment is increasingly being shaped by the same concern: whether the Fed is prepared to confront inflation before bond investors force its hand. Local earnings, valuations and policy conditions have not disappeared, but they are losing influence relative to the common macro question. Geography still determines where investors are positioned. The Fed increasingly determines why.

That common macro question increasingly revolves around credibility. Last week’s “I am the House now” challenge from US Treasury Secretary Scott Bessent revived a recurring feature of financial history: officials inviting investors to call their hand. There is one complication. In poker, the house deals the cards and collects the rake; it does not sit at the table and bet its credibility. The historical record is sparse on happy endings. Sterling in 1992, the UK gilt market in 2022 and the Fed’s inflation diagnosis in 2021 were very different episodes, but each ended with policymakers discovering that institutional authority was no substitute for a credible hand. A quarter-point hike may satisfy the futures market. It will not tell investors whether the Fed is prepared to raise again.

The ROOF data suggest that equity investors have heard the warning without yet deciding how much to believe it. Sentiment among US investors improved materially over both the past week and month, reaching +0.18, but that recovery began from a low base and has carried risk appetite only back to neutral. After a strong earnings season and another burst of enthusiasm for AI, sentiment might reasonably have been expected to be positive or even bullish by now. Instead, risk tolerance and risk aversion remain broadly balanced. US investors are still participating, but they do not want to be heavily exposed to being wrong in either direction. Earnings provided enough support to keep them invested; doubts about the Fed prevented them from becoming enthusiastic.

The worst outcome for equity investors this week is that bond investors are right: the Fed is again falling behind inflation and will eventually have to recover lost ground through jumbo rate hikes in 2027. Chair Kevin Warsh’s press conference after this week’s FOMC meeting will therefore matter at least as much as the decision itself. A 25 bp hike is already priced in, but investors will want to hear that it could be the first of several increases if inflation fails to retreat, and that the Fed is prepared to defend its price-stability mandate rather than make the minimum bet required to remain at the table. Any trace of his predecessor’s 2021 lack of urgency could turn today’s neutral sentiment into tomorrow’s defensive positioning. Investors remember that the bill for 2021 arrived in 2022.

Declaring yourself the house is easy. The expensive part begins when investors ask to see your cards.

Aggregate ROOF Trend: The black line is the aggregate mean of ROOF scores across the ten markets; the shaded grey band shows the range from the most bearish to the most bullish market on each day, indicating the dispersion of sentiment across the universe. Reading it: a rising line indicates increasing risk tolerance; a declining line indicates increasing risk aversion. 

Bottom strip: cross-market dispersion percentile — the cross-sectional standard deviation of ROOF across the ten markets, percentile-ranked against its own full history. Shaded zones mark elevated (>80th percentile) and compressed (<20th) readings. Reading it: a spike into the top shaded zone is a material divergence episode (sentiment moving in different directions across markets), a slide into the bottom shaded zone is a material convergence episode on a common driver (sentiment moving in the same direction across markets).

Regime Distribution: Three horizontal stacked bars show how the ten markets are distributed across the five regimes — today, one week ago, and one month ago. Each bar is colored by regime: red (Bearish), yellow (Negative), grey (Neutral), blue (Positive), green (Bullish). The white vertical marker on each bar shows the aggregate ROOF score for that period. Tick marks below the bars align with the regime thresholds at ±0.20 and ±0.50. Reading it: a leftward shift over time indicates broadening deterioration; a rightward shift indicates broadening improvement. Widening tails signal rising dispersion.

Market Monitor: A table showing, for each market: current ROOF score, current regime, weekly and monthly changes, regime one month ago, and distance to the nearest extreme threshold. Color cues highlight regime deteriorations (red) and improvements (green). Reading it: scan the "1M Ago Regime" column for markets that have crossed regime bands over the past month; check the "Distance" column to find markets close to the ±0.50 extreme thresholds.

Correlation Matrix (Δ1M): A heatmap of correlations between monthly sentiment changes across all market pairs, over a rolling 60-day window. Green cells indicate that investor sentiment in the two markets changed in the same direction; red cells indicate opposite directions. The rightmost column shows each market's average correlation with the rest of the universe. Important: these are correlations of sentiment changes, not market returns or ROOF levels. High correlation means investor mood in the two markets moved in sync over the past 60 days.