Speaker A
Hey everyone. Okay. Um, Jimmy's not here today. He's got some—I'll let him tell the story—but he's got a cool thing he's doing with his daughter and some family friends.
Weekly economic outlook covering bond market sell-offs, Fed policy, earnings reactions, and geopolitical impacts on markets.
Key Takeaways
- Bond yields have risen significantly, signaling market adjustments to economic expectations.
- Strong corporate earnings have not prevented equity market weakness, highlighting market skepticism.
- Fed is unlikely to cut rates soon but will focus on balance sheet policies to manage inflation.
- Geopolitical tensions, especially related to Iran, are influencing oil prices and market sentiment.
- Tariff policy changes are moderate and unlikely to drastically impact inflation or growth.
Summary
- Significant bond market sell-off with yields reaching recent highs, especially two-year yields up 15 basis points.
- Equity markets, led by Nasdaq, sold off despite strong earnings, notably Intel's post-earnings decline.
- Oil prices rallied amid geopolitical tensions, with market uncertainty around potential military actions.
- Discussion on Fed policy expectations: no rate cuts expected, with focus on balance sheet tightening over short rate hikes.
- Inflation is not considered dead; weak prints seen as anomalies influenced by strong oil prices.
- Tariff policy updates indicate a weak settlement on illegal tariffs, unlikely to cause inflation or growth bursts.
- Market sentiment is cautious with expectations of no Fed hikes but potential surprises due to inflation or geopolitical factors.
- Upcoming week includes FOMC meeting, earnings reports, and bond auctions that will influence market movements.
- The speaker emphasizes the importance of hitting asset prices via balance sheet adjustments to control inflation.
- Gold and dollar outlooks are uncertain, with gold expected to improve if bond yields fall.
Chapters
- 00:00Introduction and absence of Jimmy
- 01:19Equity market sell-off and earnings reaction
- 02:18Weekly market summary: bonds, gold, oil
- 03:50Geopolitical tensions and MOU concerns
- 04:56FOMC expectations and no rate cuts
- 06:00Fed's approach: balance sheet tightening and inflation views
- 06:54Market reaction and lack of balance sheet details
- 08:43Tariff policy update and economic implications
- 10:05Market outlook and policy impact on equities
- 11:24Deficit concerns and currency market outlook
Full Transcript — Download SRT & Markdown
Speaker A
Anyway, so he'll be back with charts and all of the normal stuff he puts out later. Um, and I'll just cover my thoughts on the economy and the what was and what will be for the week.
Speaker A
Um, I guess the highest level thing that happened last week was, um, a pretty meaningful sell-off in the bond market, um, with two-year yields going—well, all the yields going to recent highs. Um, two-year was up 15 basis points,
Speaker A
10-year was up 13 basis points, and 30-year was up nine basis points. Real yields, which I've been focused on, I sent out an email about that, uh, sorry, a tweet about that recently.
Speaker A
Um, peaked at I think 2.97. I'm looking to get, um, start acting in my beta portfolio at 3%. I'll have more on that later, but you can also read the tweet I just sent.
Speaker A
Um, [snorts] and, uh, you know, the equity markets sold off, um, led by Nasdaq in particular, obviously, and, um, you know, the response to earnings was not—was not good. Um, Intel and most notable, the one I focused
Speaker A
on was Intel, which—So, let's step back. All the earnings were great. They're great earnings, you know, that's just ridiculous to think that earnings aren't going to be great. They're going to be great.
Speaker A
The order book for tech is massive and it's not going away yet. No one's pulling orders. In fact, people are adding orders.
Speaker A
Um, CapEx is not being cut but it is increasing. So, you know, Intel was notable to me to reverse from, you know, being up, God, I think it was up 12 or 13% from its, you know, on at peak when post earnings and
Speaker A
then closed down 6 or 7%. Yeah, that's pretty shitty market response to what was spectacular news.
Speaker A
Um, and so the equity market, you know, ended the week soft. Bonds ended the week soft. Gold ended the week soft. Oil ended the week rallying, falling a little bit as early in the day on Friday, you did get some—
Speaker A
Everyone expected a taco. Like, the market sentiment last week was all about when is he going to taco and get back to the table. And so you got some hints of that New York Times article, um, in midday on Friday, which kept the market
Speaker A
from really cratering when he didn't aggressively taco when he spoke. But since then, we've seen more talks and no bombing. So, markets are tonight fairly—instead of the normal Sunday scaries that are reversed by Monday morning—are pretty ebullient, you know, doing
Speaker A
well. I expect oil's down a lot in the hyper-liquid markets. Stocks are up a little bit. Um, I expect bond yields to fall. I expect cuts to be—the hikes that are priced in to come off a
Speaker A
little bit. I expect gold to be better. Dollar, we'll see. But, you know, we're going into Sunday night where we had almost always for the last, I don't know, while now expecting a sell-off on Sunday night that reversed by Monday morning, we're
Speaker A
going the—the way. It's just notable. I don't know. Doesn't smell right to me personally that we're really, um, trying to get back to, um, the MOU, but because the Iranians have no reason to get back to the MOU, um, they are going to want more,
Speaker A
and I'm not sure what Trump is willing to give. So, he's going to have to keep bombing. So, I—I think he's going to keep bombing. I think he's going to bomb tonight, but you know, who the [ __ ] knows. Anyway, um, let's go on to what we can talk about. And let's start with, um, the week we have, um, the FOMC.
Speaker A
We have a little bit of economic news, nothing notable, nothing that's going to move the FOMC, certainly.
Speaker A
Um, we have earnings, uh, that will be market moving. Um, and we have, uh, auctions twos, fives, and sevens, which will keep a pretty heavy lid on the bond market, even though it should rally if, as oil falls.
Speaker A
Twos, fives, and sevens primarily. Um, and so, it is going to be a little bit about the FOMC, and there is a press conference. Um, so, we'll see.
Speaker A
Um, and so, let's go into that. There's nobody that thinks there's going to be a cut.
Speaker A
Nobody. And for good reason, there's not going to be a cut. Um, yet, there is a cottage industry now that is using the idea that, um, Warsh is new and wants to set a tone to make sort of ridiculous
Speaker A
claims. Hey, they may be right. I could look like a [ __ ] idiot. They may cut, hike 50 basis points.
Speaker A
But let me tell you what my view is. Um, and I think people are getting more aggressive because of the rise in oil prices, which, you know, doesn't have to necessarily be a reason to hike. It was for the ECB, and then
Speaker A
immediately oil prices fell, and they looked like idiots. Um, so let's just step back and say Warsh is new.
Speaker A
Warsh has done everything he can to explain what he wants to do, which is tighten via balance sheet and cut via short rates.
Speaker A
And he thinks inflation is going—is transitory, and he is optimistic about AI, and that's—he just keeps repeating that. And his task forces are built to support that issue.
Speaker A
[snorts] Okay, so but he also says inflation is not dead. And the reason is it's not dead. We had two weak prints.
Speaker A
Why did we have weak prints? Well, I think it's because oil was so strong and hurt the consumption basket.
Speaker A
Um, and so we had a weak print, um, and, um, were June reported in July.
Speaker A
Um, and I think that's more of an anomaly. I don't think inflation is dead. And, and I've said for a million million months now that the only way to kill inflation is to kill the wealth
Speaker A
effect, kill demand driven by low-cost financing for corporates, low-cost easy dis-saving for and borrowing for, um, for consumption.
Speaker A
And so you only hit that by hitting asset prices, and you don't hit asset prices by a 50 basis point cut or hike.
Speaker A
This just won't do it. You need 200, 300 basis points to hit asset prices using this lever, 'cause this lever is just not connected to the economy like it used to be. The lever that is connected to the
Speaker A
economy is the balance sheet. And so I do think he's going to solve inflation by hitting assets, by hitting the balance sheet, but we're going to have to wait for that and we're going to be proven that he's planning on doing that.
Speaker A
He—There's no—He just said he is. That's meaningless. So markets aren't reacting. And so we're not going to get any information about the balance sheet, but we're also not going to get a hike.
Speaker A
Because it's not going to help. Um, just in terms of Fed reading, they like to act and certainly they like to act, so we're now in a position where they're going to surprise the market.
Speaker A
60-odd, 65-odd percent of the market is, um, expectations for, uh, pause and 30-odd percent for a hike.
Speaker A
Uh, it's going to be lower after the war news. Um, they'd have to surprise the market. So typically when they surprise the market, they have reason. And there's no reason.
Speaker A
There's no cover. There's no cover whatsoever. The only cover is, "Hey, we haven't done anything in 64 months." But you, you know, that's been the same cover. They've had that cover for 64 months. So that's not going to do it. They're going to need to have
Speaker A
an inflation surprise. Policy—we got information as I was giving you guidance on. We got information regarding the tariff policy and the tariff policy is, is, um, weak, meaning 60% of the IEPA illegal tariffs is what we're going
Speaker A
to settle on. And that's below—it's about ex—it's about expectations, but it's not enough to sort of create an inflationary burst. So that's out of the question. And it's also not small enough to create a, you know, a growth burst, um,
Speaker A
and it's bad for the deficit. You look at the deficit numbers and I'll have more of this in the QRA thing 'cause I think that's particularly relevant for this coming week's deal so far.
Speaker A
Um, which will be about the QRA and it'll be about what I think is we're at an inflection point regarding the balance sheet that I think will be front-run even though the QRA itself may be, um, a non-event.
Speaker A
Um, so that's something that we'll talk about at the end. Um, so he doesn't have any cover.
Speaker A
Oil going up is a tightening really and it doesn'
Speaker A
Oil going up is a tightening really and it doesn't require a a uh policy response. Hasn't required a policy response except the the Brits, I mean the ECB.
Speaker A
Um now when you look at the committee it definitely has some hawks, you know, there's three clear hawks, Hammett, um Logan and Schmidt um and there's a few other that are willing to say, you know, maybe two hikes this year. Um
Speaker A
So there's some hawks out there and I think there's some people that are Trump haters and I think there's some for good reason if you think that they're the they're the attacks of the of Lisa Cook or and Powell have been on golf
Speaker A
course and Barr and a variety of others that sort of Trump's gone after. Um And so they'd love to hike and and if they could if they had cover. Um And I think there's some people with some irony fans like Powell himself, you
Speaker A
know, who would have is not would sort of like to have some cover to hike. So I think if they could hike, they would hike and they'd do it 25 basis points Cuz that's that nobody nobody on the
Speaker A
committee is calling for the beginning of a meaningful hiking cycle. Nobody. Even the hawks. So, I think it's super important to to recognize that for a 25 basis point hike, yeah, if if Walsh wants it, he gets it. It's fine.
Speaker A
It's a It's a two to get two to one odds bet. Make the bet if you want. But people are talking about a 50 basis point hike that is Walsh seizing credibility.
Speaker A
And he's just going to look like a [ __ ] idiot maverick if he does that after all of this laying out his Things are in a good place. Here's the direction I'm heading and the task force are are working. For him to surprise the
Speaker A
market with 50 basis points and I I mean the guys that are saying it are [ __ ] jokes.
Speaker A
They said it last the thematic markets guy said it last in June. It didn't happen. So, there's some new guy saying it now. Everybody's going to say it.
Speaker A
Hey, I'd listen to me. I'm not making any bet on this, but I'd love to see 50 basis point hike. That'd be so cool. Like bring it on. Like so much fun to see the craziness that would happen. But it's not going to happen.
Speaker A
So, there's nothing no actionable thing. But you're just going to hear that all week.
Speaker A
And then it'll disappear when he does ex- what he's going to do, which is he's not going to hike. He may get a dissenter two. I think he will. Some of the guys will say, you know, we should
Speaker A
hike. Um but he has enough support to stay where he is. And he's going to task the the committee's got is going to be about task forcing and um you know, we're in a good place. Sure, we could
Speaker A
hike. We could cut. He's not going to give forward guidance. So, I think it's going to be like that. Now, what will happen is a hike is bad for the front because you're going to get um the Fed funds rate's going to go up by
Speaker A
25 basis points and that's going to drag everything up. Now, how what does it drag up? Does it drag the 30-year yield up? A little.
Speaker A
Maybe a basis point or two or four or five. And it drags the rest of the curve up a little bit. So, it's a hike a surprise hike would be straight up mechanically bearish the entire curve.
Speaker A
However, it would have a little bit of like, "Hey, this guy's serious. He's not going to cut like Trump wants." And that could actually be a little bullish the long end. So, it's possible a hike could actually result
Speaker A
net net result in a a major flattening where the long end actually rallies. It's possible. Do I think it's going to run away? No.
Speaker A
And that part of that has to do with issuance, the supplies, all all the things that are going to come with the QRA. I just don't see that it happening, but if it were to happen, sure. If they do 50, again, the
Speaker A
mechanics would drag tens up in yield without a doubt. Like if you brought 50s if you did 50 and twos were up 40-ish basis points, tens are going up.
Speaker A
30s are going up. So, but but it would be a massive flattening trade. Um But what I think's more likely to happen is it's mostly a non-event and you get a modest steepening, slight rally in twos, slight sell-off in the long end, very
Speaker A
small. I think that's what's actually going to happen. So, that might give us an opportunity to buy my buy some tips for the beta portfolio.
Speaker A
I don't It's certainly not going to give us an opportunity to decide like sort of create a generational low on nominal bonds. And but we may there might be an opportunity to do something in nominal bonds there.
Speaker A
Um equities should mostly ignore it. That's probably a net positive for equities if they don't hike.
Speaker A
Gold should like it. The dollar should not like it. Um and so that's what's going to play out.
Speaker A
So, I don't think he surprises the market. Um you can bet on it if you if you think fair feel free. I think it's expensive through that you know 30% odds. But, you know, it's a trade.
Speaker A
Feel free. Um I'd rather see him um I'd rather trade after the after he hikes than trade before. I think there's a real opportunity if they blow out twos, there's a real opportunity to buy um the short end cuz I think
Speaker A
again, I'm pretty bearish on growth relative to expectations. Okay, so that's that. I mentioned issuance earnings. I don't know the you know, earnings you know, we've had a bunch of bad results to earnings. So, that's going to get boring for markets.
Speaker A
You're not going to get every earnings having an Intel reaction. It's going to go the other way eventually. You're going to have a knee-jerk excel off and that's going to rally. So, you know, we'll try to help you with technicals on
Speaker A
that stuff. But I think earnings are um the pie scenario that I've described is starting to play out. People recognize there's going to be a difficulty. And the hamburger scenario is playing out where issuance is coming. I I don't know if
Speaker A
Google will since they did their earnings I don't know if they'll actually do a bond deal next week but I wouldn't this week but I wouldn't be surprised if they did a bond deal immediately and there's going to be another equity deal
Speaker A
or two. Credit spreads, equities, they're just not a good place to hide in front of what I think is just massive supply.
Speaker A
So I expect those to continue to drift. Now when we get to the QRA so the QRA the dimensions or do they change auction sizes one they won't.
Speaker A
Do they change language? Coin flip whether they do take several out of the language and leave something else.
Speaker A
Um but I think when we get down to it and I'll show you the numbers so you can appreciate this.
Speaker A
They have to increase it auction sizes and it's it's not like they have I've been basically telling you they haven't had pressure to they probably should but they haven't had pressure to at this stage they're backed into a corner.
Speaker A
Terrors aren't going to be as high as they expected capital gains tax revenues which really mattered in 2025 are just not that high for 2026 and so you're going to have a real deficit problem a budget deficit problem
Speaker A
which means more debt more debt sold you're also have interest rates rising across the curve.
Speaker A
That makes the deficit rise as we start paying more and more interest on not only the long end which doesn't change but bills start demanding more interest so there's just and then as I said terrors being repaid still. The new
Speaker A
terrors are not as big so all of those things are painting them into a corner. I don't know that they'll go this quarter if they do you got to just be short everything.
Speaker A
Um if they don't, I think there's going to be a relief, and that's where you might want to start getting short some bonds again. So, we'll see. But again, that's previewing the QRA. I have lots of work to do to
Speaker A
write it, to do the analysis. But I think there's a possibility that you get that this is the type of QRA where you don't have to actually have the news.
Speaker A
Markets are going to know it's coming the next one. And so, they may start reacting ahead of it. Because people like in 2023, no one knew what the what hit them on the QRA. We called it, we got it. No one knew what hit them.
Speaker A
This time, everyone's looking at it. Now, like it's to the people that really follow this thing, they know what's coming.
Speaker A
They don't need to have the most recent analyst go through the numbers, look at what was said today, and then move on.
Speaker A
They need to look one quarter out when it's going to make a difference. And I think we're at that tipping point. So, that'll be what the QRA is the the DSR next week is about.
Speaker A
Anyway, um what else? Still have relatively small positions. Um Like to buy some bonds for as I said on in beta, just start getting a little bit bigger in tips.
Speaker A
Um Currency markets are just not providing me any real edge. You know, Japan is doing what it's doing because no one really knows when they're going to intervene. They're going to.
Speaker A
And we'll see how big they go. Um the rest of the currency markets, you know, gold is still acting terribly, and I would you know, we think it's going to go down to 3,500. That's where we're going to buy some.
Speaker A
Um and equities, we got to get through earnings. Until we're through earnings, you're going to just see chop.
Speaker A
Um and then it's the war is going to create even more chop. So, we may take some tactical bets as the markets react to all of these various things.
Speaker A
Uh but I don't think anything is pounding the table at this stage. Anyway, no questions, no Jimmy, unfortunately.
Speaker A
I think I'm going to end it here. Have a good day, everyone. Jimmy will be out with his charts um before the open for sure, if not tonight.
Speaker A
Um and um I've sent a I sent a um a um Substack around, which gave I think is a useful thing for clients to look at.
Speaker A
Take a look just cuz it's just a reiterated machine of my framework. Um and uh we'll see you on the internet.
Speaker A
Talk later.
Topics:bond marketFed policyinflationequity marketsIntel earningsoil pricesgeopoliticstariff policyFOMCbalance sheet tightening
