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QUICK QUILL — The oil price/diesel fuel shock adds another layer to the tight shipping market. The Empire Manufacturing report helped illustrate this through Current Delivery Times lengthening to a seven-month high – and 1.50 z-score. Curiously, Second District industrial firms did not anticipate follow-through for Future Prices Paid. Perhaps, Cass’s three-year-plus shipment volume slump echoed by sluggish manufacturing output supports the theme that current capacity pressures are not demand-driven. Home builders know this all too well, and the shipping shock should be added to the list of other margin squeeze factors for this sector.

TAKEAWAYS

  1. The AAA Diesel Price had risen to $4.99 as of Sunday, a record 16-day increase of $1.23 from its pre-Iran War price of $3.76; while the Cass Truckload Linehaul Index remains tethered at 2.2% YoY in February, the diesel spike flags upside for shipping costs
  2. NY Fed Mfg Current Delivery Times rose to a seven-month high of 13.7 in March, echoing Trade War 1.0 and the pandemic recovery; however, Future Prices Paid cooled to a 15-month low of 43.1, perhaps influenced by the Supreme Court’s tariff strike-down ruling
  3. U.S. manufacturing IP has yet to reclaim its post-pandemic peak, and February’s 0.2% MoM advance was driven entirely by tech and autos; the recent plateau in construction supplies IP could soon be headed downward in light of below-average NAHB Home Builder Sentiment

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 — 3.14.26

Arthur Schopenhauer wisely said, “Talent hits a target no one else can hit; Genius hits a target no one else can see.” This week saw neither. Kneeling at the altar of ego, the administration hit its targets with fatal precision. Mortgage rates rose, stocks fell for a third straight week, and income tax refunds were decimated. The enemy from within was three-for-three. If only the nation’s leader had an alter ego, he would have stayed his prosecutor bulldog and scored one victory on the week.

Instead, a moment of grace was squandered. Instead of removing the barriers to Kevin Warsh’s Senate confirmation, Trump presumably allowed D.C. prosecutor Jeanine Pirro to not only refused to heed to a federal judge’s blocking of spurious subpoenas, which would have been an elegant out, she dug in, excoriating the ruling. When asked whether she appreciated the economic ramifications of blocking Warsh’s confirmation, she retorted displaying unique ignorance with, “I don’t even know who he is.” The scariest part is that she may have been speaking freely and honestly.

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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