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Quill Intelligence

LONG MACRO

Recession probability to rise into 2025’s second half as private demand underperforms. The tariff shock should generate greater risks for a downshift in business investment and a more challenging environment for consumer cyclicals vis-à-vis consumer non-branded noncyclicals.

Manic shifts in U.S. politics harken first a deflationary gully to cross followed by the threat of impeachment and ultimately, a fourth change in administrations in as many U.S. presidential elections, a first in sequential terms since the precipice of the U.S. Civil War. The subsequent pendulum swing will manifest as Universal Basic Income/Modern Monetary Theory, and with it, the secular rise in inflation being prematurely predicted today by those positioned to profit from being short Treasuries.

Saturday Intelligence Briefing — 4.25.26

From 4.30% to 4.30%, we are once again staring down a bond market that is nonplussed after another week that was seemingly buffeted by headlines that should have produced something that defies unchanged. And yet, the yield on the world’s risk-free benchmark U.S. Treasury 10-year refuses to surrender to the headlines. Jeanine Pirro, the US Attorney for the District of Columbia, has finally acquiesced to the powers that be, dropping criminal charges that had hung over the head of a sitting Federal Reserve Chair. The odds in the betting markets that Fed Chair Powell abandons his governorship position due to expire in January 2028, have thus risen from 71% before Friday’s inevitability to 78%, opening a second seat to be filled by President Trump. The perception is that Powell is no Marriner Eccles, willing to sacrifice a leisurely life as a handsomely paid speaking-circuit road warrior to instead stay on in his position to safeguard the sanctity of the independence of the Federal Reserve.. The perception is that Powell is no Marriner Eccles, willing to sacrifice a leisurely life as a handsomely paid speaking-circuit road warrior to instead stay on in his position to safeguard the sanctity of the independence of the Federal Reserve. Hate to agree with the polls, mainly because I yearn for a strong man to make a stand. But I suspect that Powell will return to his cushy Chevy Chase Country Club existence

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TACTICAL

RATES:

Short-end and Belly best opportunities for total return. Rally keys off weaker macro. Challenged private demand, higher unemployment and lower core inflation raise Fed rate cut probabilities.

Long-end holds at elevated levels with de facto caps at 4.5% for the 10-year & 5% for the long bond with the term premium supported by fiscal malfeasance exacerbated by falling sovereign revenues and despite diminishing stimulus to the U.S. consumer.

Curve view – Bull steepener in 2025’s second half.

USD:

A sidelined Fed contrasting with most global central banks easing catalyzed a selloff in the greenback. A Fed forced to play catchup could easily thin the massively crowded trade, especially as global trade weakness impairs an open global economy vs. its closed U.S. counterpart.

CREDIT:

•  Underweight HY, overweight strong cash-flow IG

•  Lower-rated buckets at risk of dispersion with Fed Higher for Longer

•  Jobless claims deterioration makes a cautious Street rethink already-wider-spreads 2025 expectations, i.e., up default estimates as bankruptcy cycle speeds up and size

•  Fitch’s acknowledgement of cyclical consumer sector “deteriorating” fits this view

EQUITIES:

OW     Utilities
OW     Fossil Fuel Energy
OW     Senior Living

UW     Consumer Staples
UW     Consumer Discretionary
UW     Large & Midsize Banks

OTHER ASSETS:

•  USD view supports UW commodities & EM

•  Oil is a different story with geopolitical risk ramping (Israel v Iran)

•  Long MOVE to capitalize on runaway lending to Nondepository Financial Institutions triggering a credit event