QI PRO HOLY GRAIL DASHBOARD

QUICK QUILL — ADP’s weekly employment report and the New York Fed’s Current Employment index both tilt in the hawks’ direction. Cost pressures and challenged Current Business Activity, however, have us questioning the Second District’s alleged labor strength. Rate hike creep likely won’t end with a U.S./Iran deal signing because trucking market tightness is far from normalizing. Investors are sniffing out a flatter yield curve, if ZEW is any guide. Should the Fed get pulled into the global central bank hiking narrative, our yield curve inversion conviction will rise.

TAKEAWAYS

  1.  NY Fed Services Employment rose to a two-year high of 11.2 in June, and continuing claims have slid from double-digit YoY gains this year to 1.6%; however, at -10.1, Current Business Activity has been negative for 21 months as Current Prices Paid sits at an elevated 72.6
  2. Rates hike odds for September are only 25%, and while ZEW U.S. Inflation Expectations are down from March’s 80.4, June’s 45.2 is above the 26.4 long-run trend; while oil prices have fallen, Truckstop.com’s Market Demand Index has a long way to go until it normalizes
  3. The spread between ZEW Long and Short U.S. Rate Expectations has historically guided the 2s10s curve, and the -115.2 compression from December to June has no equal; the magnitude of the decline suggests an inversion is in the cards should the Fed move to tighten

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 — 6.13.26

Ever typed with a right torn rotator cuff when you’re right-handed? Welcome to my world for the last three weeks. Of course, idiosyncrasies matter little amidst manias. On one day, the Street was juggling “Knicks in Five!,” a.k.a., this weekend’s designated wedding crasher, “The World’s First Trillionaire!,” and “GOAL!!!” as the U.S. soccer team took down Paraguay. What’s not to like?

A few party poopers dared dash the dizziness. As legendary short seller Jim Chanos warned Thursday, “We’re going to be doing a $75 billion IPO for a valuation of close to $2 trillion for a company with revenues of $19 billion and negative free cash flow.” NOT! The market capitalization of SpaceX ended its first trading day with a $2.2 trillion valuation, catapulting the cashless phenom to the position of the sixth-largest publicly traded company in the world, skeptics be damned.

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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