| Good morning. The Fed's preferred inflation metric is coming, Chinese stimulus ripples continue and Arm casts an eye on part of Intel. Here's what's moving markets. — Sam Unsted Want to receive this newsletter in Spanish? Sign up to get the Five Things: Spanish Edition newsletter. US stock futures are slipping following a rally in the S&P 500 yesterday, while European stocks are up. Treasuries are rising and the dollar has edged higher, with the Federal Reserve's preferred PCE inflation metric on the slate for later. The data release is expected to show a degree of consumer caution in spending and saving. Most of the action has been in Asia, where the Japanese yen bounced as the ruling LDP chose Shigeru Ishiba — a backer of the Bank of Japan's efforts to normalize policy — as its new leader. The run of major stimulus measures in China continued as the central bank cut the amount of cash banks must hold in reserve. The long-awaited measures, which aim to boost economic growth and investor confidence, may have been too much for markets to handle, however, with a series of glitches and delays experienced on the Shanghai stock exchange as equities soared. Still, Chinese stocks are set for their best week since 2008. Increased confidence among investors about a soft landing for the US economy has left markets in a "Goldilocks zone," according to Mark Spitznagel at Universa Investments. This could be in danger of coming to an abrupt end and investors should be wary of second-order impacts like an economic slowdown, he said. Credit markets are looking attractive though following Federal Reserve rate cuts, according to Marathon Asset Management's Bruce Richards. Arm Holdings has been rebuffed by Intel after inquiring about buying the firm's product division, the latest overture made to the struggling chipmaker. Already this week, private equity group Apollo is said to have offered to invest in Intel, while speculation also bubbled up last week about a possible takeover attempt by Qualcomm. Also in the tech and media space, pay-TV companies DirecTV and Dish are said to be close to a merger that could create the biggest firm in the industry by subscribers. Big box retailer Costco Wholesale's profit topped expectations as it saw an increase in store traffic and benefited from moderating prices driving consumer spending. Its shares have dipped in premarket trading, though, as revenue fell a touch short. Chief Financial Officer Gary Millerchip said shoppers are buying more non-food items as inflation eases, including furnishings and tires, while prices are declining for other items like consumer electronics and appliances. This is what's caught our eye over the past 24 hours. A lot has been said about Elm Wealth's crystal ball challenge, where players trade the S&P 500 and 30-year Treasuries with leverage based on the Wall Street Journal's front page. The idea is to test whether perfect foresight would actually yield stellar trading outcomes. The answer among online players and 118 "young adults trained in finance" was no, partly because they got the market reaction wrong, but also partly because of poor trade sizing, or use of leverage. Five "seasoned and successful macro traders" did far better. The game is a simplified exercise, of course, but I thought it was a neat illustration about a few themes you hear often in the investment industry. While playing the game, I often chose to skip the trade because it felt impossible to guess the market reaction not knowing what was already priced in. (You could sort of extrapolate this from the framing of the articles, but not entirely.) This seemed especially true for the equity market, which the game's designers noted were harder to get right compared to bonds for most players. (Most of the relevant headlines were about the economy, which struck me as having a more direct impact on long-end bonds than the S&P 500, which would be subject to many other forces.) This underscores why there's so much interest in positioning and flows data. Of course, in this case the five pros didn't have that either. But Elm observed that they bet big on high-conviction days and skipped a third of the opportunities. The other takeaway is that making the right bet and trade sizing are different skills. You hear this more often in the context of stock-picking. It's part of the idea behind so-called "alpha capture," which puts portfolios together based on (typically) the best ideas from sell-side analysts or fund managers. There's been plenty of quant research on optimal portfolio construction, which is often now done by software.
The five mysterious pros were clearly also better at trade sizing, but some of this in the real world is also down to the constraints of your institutional set-up, like how big you're allowed to bet on your highest-conviction ideas. You could have great ideas and insights and still end up with an underperforming portfolio. Justina Lee is a cross-asset reporter based in London. Follow Justina on X @Justinaknope | 
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