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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 — 6.6.26

Ten was not meant to be. At least that’s the message markets conveyed with a bang on Friday. The meltdown was attributed to May’s jobs report, dubbed the “World Cup Blowout.” No doubt, FIFA boosted payrolls in the United States and Canada, helping to push up part-time employment, which is up 132,000 in the U.S. over the last 12 months. The same cannot be said for full-timers, who’ve seen 600,000 jobs disappear over the same period.

Add it all up and the scars are all too visible as those who’ve been out of work for six months or longer rose to a cycle high 27.5% of unemployed, the highest since December 2021. Soccer mania also helps explain large business (500+ workers) hiring per ADP, which shed 10,000 jobs in the four months ended March and has since tacked on 82,000. In the not-so-strong category are Mom & Pops. Last month, the share of small businesses planning new hires and trying to fill open positions fell to a six-year low. Not all of us can man the concession stands, it would seem.

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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