As we move through 2025, markets appear unusually serene. The CBOE Volatility Index, better known as the VIX and also referred to as Wall Street’s ‘fear gauge’, has been trending lower since April, reflecting a sense of calm among investors. Yet, beneath the surface, macroeconomic signals continue to shift as signalled by our nowcasters – real-time indicators derived from economic data and surveys that track growth, inflation and monetary policy surprises.
This week, Simply put assesses the extent to which macro signals align with market volatility. We use historical regression analysis to interpret what our nowcasters say about the current level of market complacency.
Read more: Multi asset: resilience in a V-shaped market recovery
Regression versus reality: what the numbers say
Our nowcasters currently point to an economy in transition. Growth is low but rising, indicating a recovery; our inflation signal has declined from its high levels in April, but remains in a zone of uncertainty; our monetary policy indicator is in a low and stable range, which is consistent with the dovish stance among central banks.
To better understand the level of market stress this could signify, we regressed historic VIX levels against each nowcaster. This regression analysis was performed over two periods: from 2021 to 2025 using daily data, and from 1993 to 2025 using monthly data. A level above 50% represents a positive surprise, while a level below 50% represents a negative surprise. Nearly 45% of the variation in daily VIX levels can be explained by our nowcasters and around 36% by the longer-term monthly regression.
Figure 1 shows the evolution of when our nowcaster signals deviated from 50% and the VIX levels on a logarithmic scale for the period from 1993 to 2025. The most evident periods of VIX spikes during this time were the collapse of the hedge fund Long-term Capital Management (LTCM) and the Russian financial crisis in 1998, the Global Financial Crisis of 2008, the volatility spike after Black Monday in 2011 and the 2020 pandemic.
FIG 1. Nowcasting signals versus logarithmic-scaled VIX levels, 1993-20251
Some patterns emerge: growth and inflation signalled negative surprises before the spikes in 1998 and 2011, while all three indicators fell sharply during the market turbulence of 2008 and 2020. This can be explained by the fact that some growth and inflation indicators were deteriorating around 1998 and 2011, while the majority of macroeconomic data pointed to negative surprises during 2008 and 2020, when the VIX spikes were at their highest.
From this, we can see that macro signals often precede or coincide with high volatility events. Yet, even if there are volatility signals in the direction of macro indicators, are some more significant than others? To quantify their relative importance, we analysed the coefficients of the regression to help further explain.
Read more: US economy: peak uncertainty as growth indicators misfire
Are there leaders among the signals?
To understand how each indicator behaves in relation to implied volatility, we retrieved the beta coefficients for two regressions. For the 2021–2025 period regression, monetary policy surprises dominated, with a beta of 37 (meaning a 1% increase in our macro signal historically led to a 0.37 bump in the VIX). Growth and inflation showed a beta of 10 and 6, respectively.
However, this picture changes over a longer horizon. The monthly regression shows that the direction of influence shifts. Monetary policy and growth both have a negative beta of −19 and −10, respectively, while inflation has a positive beta of 7, as illustrated in Figure 2. The comparison between longer-term estimates and shorter-term ones leaves little room for doubt:
- Monetary policy is the dominant force in both regressions, but changes from positive (short-term) to negative (longer-term). Over the longer term, dovish surprises coincide with a higher VIX (probably showing the influence of the 2008 crisis), while over the past four years, hawkish surprises have been the driving force for volatility
- The rest of the nowcasting signals are less influential, and negative growth surprises are usually volatility drivers over the longer run, while positive inflation surprises show consistently positive estimates.
FIG 2. Regression betas from VIX levels regressed on nowcasters across two periods2
The key point here is that monetary policy has been an instrumental factor in explaining surges in the VIX. Based on these estimates, we can now conduct a direct comparison between the actual VIX levels and the one calculated through our regression model, a ‘macro VIX’. This comparison can indicate whether current market pricing fully reflects underlying macro signals or whether a disconnect has emerged between sentiment and fundamentals.
Realised VIX versus macro VIX
Our macro VIX is an estimated volatility index derived from the regression of the VIX Index and our nowcasters between 1993 and 2025. This measure reflects the level of stress implied by economic data and surveys, rather than market pricing alone, as illustrated in Figure 3. Historically, the macro VIX aligns closely with major volatility episodes. The largest spikes occurred in early 2001during the unwinding of the dot.com bubble, in 2008, and during the pandemic.
Looking at the level of the macro VIX today, the situation looks worrying but not unduly so. Our estimates point to a macro VIX at 23%, whereas the market VIX is far below that level, hovering around 17%. As this is not a predictive measure of volatility, but rather a macro data-driven estimate, we cannot say that it will lead to market turbulence. However, this divergence implies that markets are currently pricing in a non-threatening environment, while macro data indicates a more elevated stress level.
FIG 3. Market VIX level versus model-estimated macro VIX, on a logarithmic scale3
As summer begins and market liquidity typically thins, we ask: are investors are underestimating fundamental risks? Our nowcasters, which are based on both hard and soft data and surveys, are not aligned with the current calm in markets. If history is any guide, such divergence will not persist for long: either the macro data will improve or sentiment will deteriorate. Summer will tell.
Read more: The here and now: when markets react more to short-term conditions
The investment implications for multi-asset investors
This comparison between macro information and market signals informs our investment process. Keeping a comprehensive perspective on the messages from our different overlays helps us keep pace with market risks and opportunities. For now, risk appetite is high and trends are positive, which encourages us to maintain a reasonable exposure to cyclical assets. Volatility estimates and macro data (for now) are signalling a well-diversified market exposure, balancing cyclical assets with hedges. Remaining exposed but well-diversified is our key investment conclusion.
Simply put, the gap between macro fundamentals and market sentiment is widening, which should encourage investors to diversify.
To learn more about our All Roads multi-asset strategy, click here. Macro/nowcasting corner
The most recent evolution of our proprietary nowcasting indicators for global growth, global inflation surprises, and global monetary policy surprises are designed to track the recent progression of macroeconomic factors driving the markets.
Our nowcasting indicators currently show:
- Our growth nowcaster has remained stable over the last couple of weeks, with the signal in a low and rising regime. There has been a slight decline in the US due to deterioration in manufacturing activity
- Our inflation indicator stayed unchanged globally, remaining in the high and rising zone. The only exception was China, where the signal increased
- Our monetary policy signal increased this week. In China, the indicator passed above the 50% threshold.
World growth nowcaster: long-term (left) and recent evolution (right)
World inflation nowcaster: long-term (left) and recent evolution (right)
World monetary policy nowcaster: long-term (left) and recent evolution (right)
Reading note: LOIM’s nowcasting indicator gather economic indicators in a point-in-time manner in order to measure the likelihood of a given macro risk – growth, inflation surprises and monetary policy surprises. The nowcaster varies between 0% (low growth, low inflation surprises and dovish monetary policy) and 100% (the high growth, high inflation surprises and hawkish monetary policy).
