Trend following has long been a staple of trading strategies. Traditionally, it focuses on market prices and returns, using technical indicators to ride the momentum. However, as markets evolve and macroeconomic data become increasingly accessible, a more nuanced approach has emerged—one that combines both market signals and macroeconomic fundamentals. The result is a more robust and insightful view of trends, enhancing decision-making in both developed and emerging markets.
Understanding Market Trends
At its core, a market trend reflects the direction in which asset prices are moving—up, down, or sideways. Traders often identify trends using tools like moving averages or momentum indicators. One common method involves comparing short-term and long-term averages—say, a 50-day and 200-day moving average—to determine when momentum is gaining or fading.
This type of strategy is easy to implement. It doesn’t require deep knowledge of economic theory or valuation models. All that’s needed is historical price data and the ability to compute indicators. Because of its simplicity and broad applicability, market trend following is widely used across asset classes, from equities to interest rate swaps.
What Are Macro Trends?
Macro trends are derived from fundamental data about the broader economy—metrics like inflation, GDP growth, or employment. Unlike market prices, these indicators are often published with a lag and can be revised after release. Still, they offer valuable context by revealing the underlying forces that shape interest rates and other asset prices.
Extracting usable macro signals isn’t straightforward. Data must be cleaned, adjusted for revisions, and made consistent across countries and timeframes. But when properly processed, macro trends provide clarity about the economic environment—something price-based indicators can’t always offer.
Complementary Strengths
Market and macro trends offer different benefits. Market trends react quickly to new information, making them useful for timing. However, they can be ambiguous. For example, rising bond yields might reflect stronger inflation or a rise in credit risk—two very different scenarios.
Macro trends, by contrast, are more specific. They point directly to economic developments, such as accelerating growth or inflationary pressures. Yet, their downside is timeliness; they often lag behind real-time market moves.
This contrast makes a compelling case for combining both. Together, they provide a fuller picture: market trends capture the immediate sentiment, while macro trends ground those signals in fundamental reality.
Evidence from Rates Markets
A study of short-term interest rate swap markets across 15 countries—including major economies like the U.S. and euro area, and smaller markets like Poland and South Korea—demonstrates the power of this dual approach. Two trend types were compared:
- A market trend based on the 50- vs 200-day moving average of swap rates.
- A macro trend capturing excess inflation and growth, defined as deviations from long-term economic targets.
In large economies, these two measures showed a strong correlation, confirming that market trends often reflect the same macro forces central banks respond to. Importantly, both trend types had similar predictive power for future swap returns. But macro trends showed slightly better accuracy and stronger Sharpe ratios.
In smaller markets, where data quality may be weaker and external influences greater, market trends performed marginally better. Still, macro signals provided value, especially when refined using additional information.
Improving Macro Trends with Market Context
To enhance the predictive power of macro trends, two adjustment methods can be applied:
1. Market Information Enhancement
This method modifies a macro trend based on how markets behave after the data’s observation period. If a strong inflation reading is followed by falling interest rates, it may indicate that the macro trend is outdated or misleading. In this case, the macro signal is discounted. Conversely, if the market moves in a direction consistent with the macro data, the signal is strengthened.
In practice, this adjustment slightly improved both accuracy and correlation with future returns, especially in developed markets.
2. Market Influence Adjustment
Here, macro trends are adjusted based on the influence of other markets—specifically equity performance. For example, a drop in equity prices often signals a weakening economy or tightening financial conditions. When macro indicators suggest strong growth but equity markets decline, the macro signal is dampened. If equities confirm the macro outlook, the trend is reinforced.
This approach led to even better results. In both large and small markets, adjusted macro trends were more closely aligned with subsequent rate moves and produced more accurate signals.
Why Use Macro Trends at All?
If market trends are easier and sometimes just as effective, why bother with macro signals? The answer lies in their structure and interpretability. Macro trends are:
- Easier to combine logically: You can aggregate multiple economic indicators meaningfully.
- More predictable in real-time: It’s clearer how news events affect growth or inflation than how they influence market sentiment.
- Complementary to market data: They fill in the gaps that market prices alone can’t explain.
In short, macro trends offer a toolkit for building more sophisticated, nuanced strategies. When blended with market trends, they create more resilient and informed trading signals.
Final Thoughts
The future of trend following lies not in choosing between market and macro indicators but in integrating them intelligently. By leveraging both timeliness and context, investors can create strategies that are not only reactive but also grounded in economic fundamentals. Whether you’re trading in global rates or other asset classes, the combined approach offers a path to more robust and adaptive investing.
