QI PRO HOLY GRAIL DASHBOARD

Please LOG IN to view this protected content.

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 — 5.23.26

“Critically, consumers appear worried that inflation will increase and proliferate beyond fuel prices, even in the long run.”

Sometimes one sentence says it all. These 18 words from the final May University of Michigan (UMich) consumer survey spoke directly to the risk for the real-world inflation expectations’ genie to come out of the bottle. The Fed can’t have that. As if coordinated by UMich and the Federal Reserve, Governor Christopher Waller’s Friday speech, “Policy Risks Have Changed,” felt like no coincidence. These excerpts were telling:

“I have become more concerned that higher energy prices may have a lasting effect on inflation.”

“…Uncertainty over the [Middle East] conflict and how the energy shock will spread to other prices led me to support a pause in rate cuts at the FOMC’s last meeting in April.”

“…Higher energy and commodity prices are pushing up headline inflation and prices for other goods. Inflation is not headed in the right direction. Based on this recent data, I would support removing the ‘easing bias’ language in our policy statement to make it clear that a rate cut is no more likely in the future than a rate increase.”

“I can no longer rule out rate hikes further down the road if inflation does not abate soon, and that is especially true if measures of inflation expectations, some of which have risen lately, show signs of becoming unanchored.”

Continue Reading

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