“This is the business we’ve chosen” Hyman Roth
I remember when I was a kid (yes, we had electricity…); no cell phones, way less structure. I went out with your friends and came home when it was dark. Sometimes, my friend’s mom would call my mother and ask if I could stay for dinner. Then I would walk or bike home (not,* gasp*, Uber!). I also remember thinking how cool it must be to be ‘grown up’; make your own decisions, spend what you want, go to sleep whenever you want…you get the drift. My kids still can’t fathom how I survived childhood without a cell phone and the internet.
If only I knew. Yes, technology has complicated and sped up life, but I suspect ‘twas always like this; it’s never as easy as it appears.
Same with trading. When I first started at Lehman in 1987, I would come home, and Mindy and I would watch the evening news. We were partial to Peter Jennings, and it was laughable when, after a chaotic day in the markets, he would summarize — near the end of the 30 minutes — with a one-liner along the lines of, ‘In stocks today, the Dow fell 5 points, and trading was heavy.’ Now, even those immersed in the markets are mostly playing catch-up all day, trying to parse what is moving the markets at any given moment—forgetting about day-to-day— and juggling myriad news and data streams; we have to watch Twitter, for God’s sake!
Ah well. OK, so the Fed hiked. Now what?
**THE HIKE WAS THE EASY PART.**16 of 18 officials want more; futures price less. I like the front end short, at my price. I’M WRONG IF an official takes October off the table.**THE OIL PREMIUM IS A PLAN, NOT A REPAIR.**Brent gave back $3 on a restart promise. I still like the barrel long. I’M WRONG IF Brent settles below $95.**THE LONG END IS THE WRONG LEG.**The 30Y rallied on a hike day. I’M WRONG IF the 30Y outpaces the 2Y on a 5bp selloff before 21 September.**IT IS STILL ONE BET.**Most of what I like pays if money stays expensive; nothing pays if Warsh is done. I’M WRONG IF the 2Y closes under its pre-meeting 4.67%.
I think the market priced the hike correctly and is guessing at everything after it. The next decision has no date on it, and a book that only pays when money stays expensive has to buy that bet at a price.
THE SETUP.
Nobody dissented. Four officials penciled in two more moves this year, none penciled in a cut, and Goldman now expects October (Bloomberg).
Warsh said the summer readings do not show the underlying trend improving, with the Fed’s preferred PCE gauge at 3.7% y/y in July (Bloomberg). Then he held the shortest press conference on record. Less talk, more tightening; I can live with that.
The president says he gave Warsh permission to vote with a ‘hostile board’. Did I miss the part of the Federal Reserve Act that covers permission slips?
“We would at this stage be a little bit more cautious than some commentators who confidently declared Warsh to be his own man. We don’t know that yet, nor will we for a long time.” (
[Eurointelligence])
A chair who needs permission to hike once may not get it twice. That is my Branch B.
THE EVIDENCE.
The curve voted. The 2Y took 7bp and the 30Y gave back 1bp, the ninth front-led session in nine tests. An inflation scare does not rally the long bond into a hawkish dot plot, though a crowd very short duration covering into the event could also be the reason.
The count of officials who see growth risks weighted to the downside went to zero, from 14 earlier this year.
Treasuries are losing their premium anyway. The ‘convenience yield’ over top-rated corporates had all but disappeared by July, per Lira Mota’s work updated by Hanno Lustig (
The Economist), and Guneet Dhingra, who runs US rates strategy at BNP Paribas, is short the 30-year.
THE BARREL.
Brent is $101.92, down 3.7% and at its session low. Riyadh is moving crude out through Gulf ports and ship-to-ship transfers off Oman, with Yanbu storage under 15 million barrels (
OilPrice).Beijing leaned on Tehran. Wang Yi told Araghchi on Wednesday that all parties should “take effective measures to reopen the Strait of Hormuz at an early date,” and pointed Iran and the US back to their 17 June framework. Four ships transited on Tuesday, against about 125 a day before the war (
The National). A transit accord is the one event I would not hold the barrel through.Asia is still paying up. Shanghai crude traded a record $129 on Wednesday and New York diesel a record $221 a barrel, per Argus (
FT), and one shipowner reportedly paid more than $5 million for a Panama Canal slot (Reuters).
THE ARITHMETIC.
THE CASE AGAINST.
Joachim Klement at Panmure Liberum thinks the 2027 hikes are overdone and the next move in yields is lower (Bloomberg).
Pensions are the other read. The top 100 US plans are about 112% funded, and a quarter with stocks up about 1% and bonds down 2.2% means they buy bonds into 30 September (Citadel Securities).
A confirmed restart may simply be the end of it: the diesel impulse fades, and a Fed that hiked into a supply shock stops when the supply returns.
THE BALLOT.
The House voted 262-159 to give the president tariff powers aimed at Russian oil buyers: up to 500% on Russian goods and another 100% on the top five buyers, China, India and Turkey among them (Bloomberg). Gasoline is the midterm issue, and this adds demand to a tight market.
Trump threatened “very serious tariffs” on Europe over its offer to make Canada an associate member (
Reuters). Carney answered in Strasbourg: “We do not seek power to dominate others.” Tariffs are a price level, and a Fed that just hiked on prices cannot ignore them before November.
7:00 ET, the Bank of England. Expected to hold at 3.75% on a 6-3 split. Gilts at 5.30% need a hawkish statement.
8:30 ET, claims, Philly Fed, housing starts. Surveys: 206,500 claims, Philly Fed 32.1 from 47.4, starts 1.32 million. A Philly Fed well under 32 is Branch B’s first data point.
7:30 PM ET, Japan CPI, then the Bank of Japan Friday. Headline CPI is seen at 2.0% y/y, and every Bloomberg survey respondent expects a hike to 1.25% from 1%. The yen is 155.9.
Friday, the quarterly expiry. About $7 trillion of US equity options roll off.
Behind the wall this morning:
THE BOOK: 4 live lines, 1 new today, each with the factor it monetizes, its size and the condition that kills it.
The front-end short I wanted most, why it failed my floor at yesterday’s close, and the yield where it goes on.
Four more cut lines within a dollar of the floor, with the price I will pay for each.
The financials sleeve: the exchange that earns on a contested path, and the private credit manager that pays for it.
What a one-and-done Fed does to the book, line by line.
The free note is what I see. Below the line is where my own money goes and where it gets out. Subscribe at marketmusing.com.
Disclaimer: Opinions are mine alone and may change. It does not constitute an offer to buy or sell or a solicitation of an offer to buy or sell any security, loan or asset or to participate in any trading strategy. It is not intended to form the basis of any investment decision, should not be considered a recommendation, and does not constitute an offer or solicitation with respect to the purchase or sale of any investment, nor is it a confirmation of such terms.
