Surf’s Up, Dude · Storyflo

“The race is not always to the swift, nor the battle to the strong, but that’s the way to bet.” Damon Runyon

I don’t know if it's getting older or the torrent of events, but time seems to be accelerating. I cannot believe it’s just about October. It’s still dark when I wake up; I need to wear a sweatshirt to walk Cody the Wonder Dog, and, of more relevance to everyone else, that means elections are right around the corner. Early voting has begun in many places. I do not believe the market has priced in the likelihood of a blue wave as high consumer and energy prices further impact support for the Administration and Republicans. More importantly, perhaps, the market is dismissing the much-greater-than-zero chance of an aggressive response from the entire House, which could cause disarray and uncertainty in Washington. I’ll save y’all the list of possibilities—those of you who care have read them in myriad places — but I will remind us all that markets HATE uncertainty. Which I think we will get in spades, both barrels, between November and January.** ** Caveat Emptor

**THE MARKET IS TRADING THE WRONG BARREL.**Crude futures have fallen four sessions whilst diesel prints records. I like the product side of the energy complex. I’M WRONG IF cracks narrow three sessions running.**THE FRONT END HAS NOT FOLLOWED CRUDE DOWN, AND IT WON’T.**The 2-year is 2bp higher than on hike day after a 4.5 percent fall in the barrel. I stay short the front end.**BOTH SIDES OF THE OIL TRADE LOST LAST WEEK.**Energy lagged the index by 384bp Monday and financials by 113bp. In financials I want fee income, not balance sheet.**THIS TAPE IS ONE BET ON A HIGH FRONT END.**The concentration is real and I am not pretending otherwise. I’M WRONG IF the 2-year gives back its post-hike gain and closes under 4.55 percent.

I think the tape is pricing a disinflation that is not in the barrel it is watching, and the front end has already told everyone so.

START WITH WHAT MOVED.

Brent is $98.72, down 1.61 percent, fourth straight decline, off a $100.34 settle. It printed $102.29 overnight before reversing on a Kyodo report that Iran would reopen Hormuz inside seven days if the American blockade lifts.

The barrel has fallen roughly 7.7 percent in four sessions. Over the same four sessions the market raised its October hike probability from the mid-40s to 56.5 percent.

The 2-year closed 4.76 percent, 2bp above hike day. The 10-year fell 5bp to 4.96 percent and the 30-year 6bp to 5.29 percent.

That is a market buying the long end and refusing to buy the front end, on a week the barrel collapsed.

WHY THOSE TWO FACTS SIT TOGETHER. A falling crude future is not a falling energy input when the constraint is downstream. Retail diesel is above six dollars. Middle East diesel shipments have halved to roughly 800,000 barrels a day. The Baltic Dirty Tanker index gained 3.94 percent to 5,092.

It does not have to mean that. The same four sessions are explained perfectly well by a committee that turned hawkish on its own and a barrel that fell for unrelated reasons, in which case the two series never had anything to do with each other. I would hold that view if the front end had given back even a basis point, and it has not.

AND THE SUPPLY STORY IS THE OPPOSITE OF WHAT IT LOOKS LIKE.

The East-West pipeline has been shut since a drone attack on the 10th. Its purpose was to reach water without passing Iran.

Aramco is routing tankers back through the Strait of Hormuz, the waterway the line was built to avoid. Ship-to-ship transfer capacity in the Gulf has reached its limit and the jam is lengthening deliveries to Asia.

At least five tanker attacks or security incidents have been logged in Hormuz since the 16th, two of them yesterday.

More crude is reaching the water through the one chokepoint an Iran conflict threatens. The balance loosens and the tail fattens in the same week.

THE COMMITTEE CANNOT AGREE ON WHAT THIS COSTS. A reader could take the split the other way and read the split as healthy disagreement early in a cycle. Dissent usually is. Three speakers, three terminal paths, one meeting. Goolsbee says the only way back is the hard way and that wages would need to fall. Warsh says he does not believe the two halves of the mandate are working at cross purposes. Musalem wants more hikes and says the labor market need not slow to deliver them. Collins penciled a second this year and then nothing next year.

THE PRICING IS THE PART I KEEP COMING BACK TO. Markets are pricing the policy rate at 4.7 percent by mid-2027, up from roughly 3.1 percent priced in February. That is a large repricing of the path, and it still amounts to one of the shallowest cumulative tightening cycles on record, because it starts from 3.75 to 4.00 percent. The second half is the mispricing.

THE CASE AGAINST. If Hormuz reopens on Iran’s offer and Yanbu loads again, crude has $10 to give, and every energy line I carry is wrong within a week. Saudi Arabia is testing the pipeline for a restart now. Two things make me wait. The offer is conditional on lifting a blockade the administration has not lifted, and the Revolutionary Guard spent yesterday promising to change the geography of the war. Physical normalization is vessel counts and insurance quotes, not a wire headline.

AND THE EQUITY SIDE IS NOT CONFIRMING ANY OF IT. The index closed 0.67 percent below its year-high, with 31 percent of members above their 50-day moving average. The Russell sits 6.3 percent below its high and under its own 50-day at 2,967. One measure of long-term uptrends has more names at lows than highs against a benchmark knocking on a record, a configuration whose only modern analogs are January 1973 and November 1999. The benign reading is that an index led by a handful of very large companies will always look like this and the breadth measure has simply stopped describing the market it is drawn from. That argument has been available every year since 2023 and it has been right every year since 2023.

**10:00 ET, Richmond Fed manufacturing.**Consensus 2 after 4, with business conditions at minus 12. A soft pair on a morning the committee is arguing about whether restraint costs jobs is the print that moves the front end.**10:20 ET, Jefferson on Treasury market functioning.**The long end rallied 5bp through a hike. Anyone explaining who is actually buying it is worth the twenty minutes.**13:00 ET, 69 billion dollars of 2-year notes.**The auction prices into the exact instrument this sheet is largest in.**Trump at the General Assembly.**Traders are watching for an Iranian meeting on the sidelines. That headline reprices crude before it reprices anything else.**The euro at its lowest since late July.**Lane called this a second wave of energy price rises and swaps now carry about 88bp of European hikes over a year, up from 83 on Monday.

Two of these argue for the barrel falling and the third says the plumbing does not care. That is the honest state of the tape.

**THOR INDUSTRIES.**Net sales of 2.31 billion dollars beat a 2.17 billion estimate and earnings missed at 78 cents against 87. Gross margin came in 12.4 percent against 13.8 expected. Management named stubborn rates, elevated fuel costs and inflation, and guided to a flat retail environment through fiscal 2027. That is the consumer paying the diesel bill, reported as a margin line.**EXXON MOBIL.**Energy closed 2.29 percent lower Monday whilst the index gained 1.49, a 384bp gap on a session crude fell. Jefferies cut both Marathon Petroleum and Valero to hold the same morning. I am short the integrated name and long the product structure, because a refiner short is the wrong side of a downstream shortage.**AMD.**Crossed a trillion dollars in market value for the first time, inside a semiconductor index that gained 4.3 percent on its fifth straight advance. The move is real and it is one product’s first week. Texas has frozen every data center permit pending a grid audit, and Texas is one fifth of the national pipeline.

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Surf’s Up, Dude · Storyflo