Macro Risk Scenarios: Building Playbooks for Recession, Stagflation and Risk‑On Episodes

Introduction — Why scenario playbooks matter

Macro regimes change the rules of the game. A single risk‑regime shift—from growth to recession, from disinflation to rising prices coupled with stagnant growth (stagflation), or to a broad risk‑on rally—can flip correlations, blow up naive carry bets and rewrite volatility expectations. This article gives FX and multi‑asset traders compact, operational playbooks: the signals to watch, how to size and hedge positions, and clear execution triggers to preserve capital and capture opportunity.

These playbooks focus on tradeable rules and practical hedges rather than long essays—so you can convert regime cues into rules for sizing, stop placement, and cross‑asset confirmation.

Current backdrop and leading signals (brief)

As of late 2025 the global macro backdrop is fragile: the IMF’s October 2025 World Economic Outlook highlights a modest slowing in global growth and persistent variation in inflation across countries. These shifts leave downside risks to activity and upside risks to prices in some economies.

For the United States specifically, multilateral institutions revised growth lower in 2025 and have raised recession probabilities versus 2024; trade‑policy shocks and tariff measures were explicitly identified as material downside risks to momentum and supply chains.

Central bank policy is in transition: major advanced‑economy central banks, including the Fed, have started to move from an outright hiking stance toward rate reductions as labor‑market slack appears and growth slows; the Fed cut rates in 2025 and signaled further cuts contingent on data. At the same time, inflation remains above target in some economies—creating the classic tension between growth and prices.

Key tradeable signals to monitor

• Real rates and the short end: sudden downward moves in real yields (market pricing of cuts) typically precede risk‑on rallies; a sustained rise signals recession risk for risk assets.
• Yield curve slope (2s‑10s): persistent steepening while growth weakens is an early recession signal; inversion unwinding can be volatile.
• Cross‑asset breadth: equities + commodity price divergences vs. sovereign bonds provide quick regime confirmation—e.g., rising core yields and falling equities suggests stagflation risks.
• FX funding spreads and cross‑currency basis: widening USD funding premia often indicate liquidity stress and precede risk‑off moves.

Actionable playbooks: rules, assets and hedges

1) Recession playbook — defensive, duration & quality

Regime cues: persistent softening in high‑frequency GDP proxies, jobless claims rising, yield‑curve inversion or sustained decline in corporate PMI; flight‑to‑quality flows into core sovereign bonds and the USD.

Tactical posture:

• Reduce directional carry and risk exposure; prioritise capital preservation.
• Shift to quality FX: long USD (funding permitting) against cyclical pairs like AUD, NZD, NOK; prefer pairs with safe‑haven and funding characteristics that match your balance‑sheet constraints.
• Duration: increase allocation to high‑quality sovereign bonds (US T‑notes, German Bunds) or use short‑term 2s exposure if you need quicker liquidity.
• Equities: move to low‑beta sectors and increase exposure to defensive sectors (consumer staples, healthcare) or buy index puts with staggered expiries to manage cost.

Hedges and execution rules:

• Use staggered stop‑loss gates and equity‑hedge ratios (e.g., 30–50% of equity beta) rather than single‑point hedges.
• Prefer options layered across expiries to avoid concentrated vega risk—buy protective wings and sell near‑dated premium when IV spikes.
• Size conservatively: reduce position size by volatility‑adjusted factors (e.g., target per‑trade risk = 0.25–0.5% of equity during recession stress).

2) Stagflation playbook — inflation hedge + selective growth protection

Regime cues: rising headline inflation while real activity weakens, higher unemployment, and commodities (notably energy and selected food staples) rallying alongside stagnant or contracting PMIs.

Tactical posture:

• Inflation‑sensitive assets: increase exposure to commodities (energy, industrial metals) and inflation‑linked bonds where liquidity allows.
• FX: long commodity‑linked FX (CAD, NOK, AUD) vs. weak‑growth currencies; prefer crosses that reflect term‑premium advantages.
• Equities: favour companies with strong pricing power and low capital‑intensity; rotate out of highly cyclical, debt‑heavy firms.

Hedges and execution rules:

• Use short real‑rate exposure if you can via swaps or derivatives: rising nominal yields and lagging real rates compress real returns for fixed income.
• Consider partial inflation caps via options on commodity futures to limit hedging costs.
• Maintain tighter liquidity buffers—stagflation can produce unpredictable volatility spikes in both equities and bond markets.

3) Risk‑On playbook — capture directional beta with discipline

Regime cues: falling systemic risk premia, equity breadth widening, falling VIX (or equivalent), and central bank communication consistent with easing/normalising conditions.

Tactical posture:

• Re‑risk into cyclical FX and carry trades (e.g., higher‑yielding FX vs. safe‑haven USD/CHF), but use stop bands tied to volatility and funding costs.
• Increase allocations to equities, small‑cap and high‑beta sectors; consider momentum overlays and dispersion trades to capture cross‑sectional gains.
• Reduce inflation hedges and rotate out of safe commodities into industrial cyclicals.

Hedges and execution rules:

• Implement volatility‑parity position sizing: scale sizes up as realized volatility falls but cap allocations to avoid over‑leveraging.
• Use trailing stops and session‑specific exit rules (e.g., close overnight partial positions before major data or central bank events).
• Monitor funding costs and cross‑currency basis daily; unwind carry positions if basis deteriorates beyond predefined thresholds.

Risk management, sizing and checklist

Across all regimes:

• Pre‑trade checklist: regime signal confirmation (≥2 independent indicators), macro calendar check (major CPI, employment, central bank events), liquidity check (bid/ask, depth).
• Sizing rule: define per‑trade risk as a percent of capital adjusted for regime—e.g., 0.25% in severe stress, 0.5%–1% in risk‑on.
• Correlation monitoring: run daily cross‑asset correlation checks; if correlations move above 0.7 across your portfolio, tighten stops and reduce size.
• Governance: automated kill‑switches on drawdown triggers, time‑based de‑risk rules when consecutive losing days exceed threshold.

Conclusion

Macro playbooks turn uncertainty into repeatable actions. Use the signals above to classify the regime, apply the corresponding tactical posture and hedges, and enforce strict sizing and execution rules. The current data environment—slowing growth, lingering inflation dispersion and shifting central bank guidance—means traders must be nimble: build checklist‑driven rules, test them in paper or small live size, and iterate as the macro story evolves. (See IMF and OECD publications and central bank announcements for evolving outlooks and policy guidance.)