By Peter Tchir of Academy Securities
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).
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 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.
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.
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.
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).
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!