Две горячие войны и подсчет... и ФРС в среду

By Peter Tchir of Academy Securities

On Shaky Ground

Let’s start by wishing everyone a happy Father’s Day, or more broadly, let’s just keep family and friends in mind as the world takes a turn for the worse. Two hot wars. There is probably more fighting going on than just in Ukraine/Russia and Israel/Iran (and certainly death and devastation is occurring in parts of Africa), but that has been where everyone’s attention has turned.

Academy will continue to keep you updated on the events in the Middle East and our projections (that this will potentially last several weeks, not days) via our Geopolitical Analysis. If you don’t have access to our full history of SITREPs and Macro Strategy Reports, please reach out to your contact at Academy.

The latest SITREP was Friday evening – “Iran Commences Missile Strikes on Israel.”

Today, in an effort not to inundate you with missives from Academy, we will keep this contained as we will certainly have more SITREPS in the coming days and are planning a webinar for Tuesday (registration invite to follow).

Macro in a Minute

Last weekend we took stock of the current situation in Where Are We Now?

We followed up midweek, ahead of the auctions, with the view to Continue to Add Duration. We had hypothesized that the auctions would be strong, and they were.

The rates trade was derailed, sometime in the middle of Thursday night, when global yields went from trading as a “flight to safety” to seeing the risk of higher energy prices and larger deficits due to military spending. That is how we expected them to trade in the event of more war, but we just missed the timing of the escalation.

Into the close on Friday, we reiterated our bullish stance on Treasuries and expectations that ongoing conflict (where we are now) would hit the “safety” trade.

The Fed

The Fed decision comes out on Wednesday, just ahead of the Juneteenth holiday.

When I pull up the Bloomberg WIRP Function (World Interest Rate Probability), I see that a full cut isn’t priced in until October (86% in September). The market is pricing in exactly two cuts for the year.

We continue to take the under on timing and the over on number of cuts.

• Inflation has been contained.
  • More importantly, at current tariffs rates (call it 10% with the rest of the world), there will be some inflationary pressures, but they will take time to bleed into the economy.
  • Many even question whether they will ever be passed on to prices. Our base case is that they creep into the economy, but slowly, as it takes time to pass on price increases, and many will wait to see how it plays out before even trying, and yes, exporters will face some pressure to cut prices, which in a slowing global economy, they will likely do.
  • U.S. tariff policy could change on a dime, but more pauses seem likely and we can manage through that (with regards to inflation).
  • Our view incorporates the risk that tariffs will slow the economy somewhat, also dampening the potential for inflation.
  • Aside from the Headline Establishment NFP number, it is difficult to find other signs of economic strength. Yes, we are conditioned to react to the headline number that is published. Who cares about revisions? The awful Household Survey? The fact that response rates are abysmal – even on the “admired” Establishment Survey? Who cares that ADP (presumably with some real-time access) doesn’t see jobs being created like that? While we have “maligned” the Birth/Death adjustment for some time, more and more people are doing serious work on this. This is contrasted against our “finger in the air” approach, which is coming up with similar conclusions – the Birth/Death model has not kept up with the changing job world (especially the GIG economy). JOLTS doesn’t seem to be signaling job growth? Oh, and let’s not forget the very large downward revision.
    • The Fed will almost certainly acknowledge a cooling job market.
• Oil is “transitory.”
  • The fear that the Fed will be cautious to cut because oil is rising (because of a war) seems very misplaced.
    • Oil is the definition of transitory in Fedspeak (they constantly talk about looking through oil prices and focusing on the labor market). We have EX-FOOD & ENERGY for a reason.
    • It would seem out of Powell’s nature to not admit that yes, we have higher oil prices currently, but that we also have higher uncertainty in the global economy.

Maybe the press conference won’t put July on the table, but that is a bet we like!

It would also take some pressure off the administration. Not that the Fed is political, but the narrative they are facing – weaker jobs, manageable tariffs, and a weaker dollar, even as other central banks cut, should give the Fed the ammunition to “unbalance” the risks and at least hint to markets that they are leaning back towards cutting.

While July might not get priced in this week, there is plenty of room for the curve to price in more cuts, sooner.

Now that interest expense is such a large portion of our spending, any move forward in cuts should help the long end as it can reduce deficits. That is so contrary to how I’ve been trained to think, it almost hurts to write, but we’ve never had interest expense as such a big part of the annual deficit before.

Remain bullish on bonds this week, between war and the Fed.

Deals

The equity market in particular seems to be looking for more “deals.” That we will ratify what has been “agreed” to with China, etc. The status quo of “more pauses” isn’t bad, but that, or better, is already priced into equities.

Expect a slowdown on the potential announcement of deals.

• The administration relies on a handful of people to carry out policy. Maybe there is a lot going on behind the scenes, but this administration (even more than some others) seems to rely heavily on high level negotiations. It doesn’t seem like teams of “worker bees” are sent out to negotiate a deal that is then ratified by the senior advisors. Or maybe tweaked, but the bulk of the work is still being done by relatively junior people. The hands-on approach, with President Trump often very involved, is one of the pillars that the administration believes makes them successful. It will be difficult for the handful of advisors to focus on so many deals, as this escalation has occurred and they get pulled in multiple directions. That is the risk of this sort of strategy (and maybe why so many hockey teams with star players do well in the regular season, but fade in the playoffs – I’m thinking of the Leafs, but I’m sure many fans have similar thoughts).
• It is difficult to argue that the U.S. is winning a lot of deals. If the U.S. was winning negotiation after negotiation, it would be easy for others to fall in line. Success breeds success. While I think the administration has “pivoted” from the disastrous Liberation Day tariffs, you can also see why some (many) people talk about the TACO trade (Trump Always Chickens Out). While that has once again put “Taco, Taco man, I wanna be a Taco man” into my head, I think it is at least somewhat unfair. He tried, people didn’t respond the way he expected, and he avoided clinging to potentially disastrous policy. Having said that:
  • No Peace in Russia/Ukraine. While “24 hours” was hyperbole, it is now well past that. Probably more importantly, the “plan” of pushing on Ukraine and catering to Putin seems to be reversing course.
  • Iran. Ongoing, and already escalated beyond where it was, rather than moving rapidly to deal stage.
  • U.K. trade deal. So far that is it. Somewhat vague, some promises to buy things they were already likely to buy, and not at the top of most people’s list of 5 most important trade counterparties.
  • China. The main thing we can hope for is that the realization that we NEED to refine and process rare earths and critical minerals is finally top of mind! If this can drive National Production for National Security as the main talking points (and action items in the coming months) that would be great for markets and seems both obvious and absolutely necessary.

I’m very worried that deals will take longer to get and that could be disappointing for equities.

A push to accelerate National Production for National Security would be great for markets (it would be more effective, we believe, with the involvement of close allies, but that might be a step too far for this admin to pivot to, just yet).

Bottom Line

If it is possible to like energy (and commodity related stocks) and bonds at the same time, then that is our position.

It sounds weird, but we think the confluence of events supports both (more comfortable on the stocks and credit spreads than the commodities themselves).

Escalation risk and the potential to see deals “sidelined” or “delayed” for a variety of reasons could weigh on equities, though a dovish Fed could offset that (I don’t like the concept, but it has played out time and again).

Enjoy time with friends, family, and colleagues and it is okay to reach out and call someone, even if it isn’t their “day.” Though calling your parents might not be a bad idea today!