A New Era Is Beginning In Markets | Weekly Roundup

Kevin Warsh's first FOMC meeting marked a sharp break in Fed communication style. Warsh cut roughly 80 percent of the FOMC statement, leaving a document ending with the phrase "the committee will deliver price stability," and did not submit his own dot plot, meaning the rest of the committee drove the hawkish narrative. Speakers characterized the resulting hawkish dot plot as a capitulatory peak rather than a genuine signal of coming hikes, noting that non-voting Fed presidents likely submitted hawkish dots partly as a political signal against the incoming chair. Forward guidance as a policy tool was described as a Bernanke-era innovation designed to suppress rate volatility at the zero lower bound, and speakers predicted secular rate volatility will rise now that the practice is being unwound.

Oil is down approximately 30 percent from the prior dot plot when the Fed remained dovish, one-year inflation swaps have returned to levels seen when the war started, wages have declined from roughly 5 percent two years ago to roughly 3 percent now, and the Blackstone CEO stated shelter costs are running in the low ones by his measure versus low threes in government data. Tariffs are now effectively at net zero, removing core goods inflation pressure. Speakers expect headline inflation to be significantly lower next month and predicted that July CPI data and cooling labor market readings over the next six weeks will confirm the peak hawkishness thesis before the next Fed meeting, though they acknowledged the trade will not be easy to hold.

The market is pricing in two rate hikes by mid-2027, but speakers said there is no chance of a hike by end of this year, with only one of 19 Fed committee members projecting three hikes and that member possibly not a voter. The two-year yield was near 4.20 percent and backed off slightly after the meeting. Fund category traders held a record short position in SOFR heading into the meeting, meaning most of the hawkish move had already been front-run, and the entire street is short bonds on the long end as well, which speakers view as a favorable contrarian setup. Approximately 85 percent of US Treasury issuance is currently on the front end of the curve, and a Torsten Slok chart attributed the absence of a rate spike over the last five years to that front-end-heavy pattern.

The dollar is breaking out higher and the yen is breaking out of roughly a 20-year base near the same price level as the 1985 Plaza Accord reversal. Speakers described the chain of effect from FX volatility as moving sequentially into yield volatility, credit spread widening, and then price-to-earnings multiple compression. A reverse carry trade triggered by the dollar breaking things elsewhere in the world was identified as the main macro catalyst being watched. Oil rolling over reduces Japan's import costs and could limit the need for Bank of Japan rate hikes, keeping a lid on further yen weakness. High yield credit spreads have continued to move sideways throughout recent volatility, leaving the capex cycle intact, and speakers predicted that unless spreads blow out, the rally in AI beneficiary stocks is unlikely to stop. Corporate bonds are priced off the longer end of the yield curve rather than SOFR, making long-end yields critical to AI infrastructure funding. Speakers predicted summer seasonality, declining oil prices, potential Russia-Ukraine resolution, and vol-targeting fund reallocation set up a low-volatility grind higher through summer, with the real policy test unlikely until fall.

MicroStrategy's equity and debt instruments are trading distressed. Quinn noted the stock still trades above its liquidation value after netting out debt and preferred shares from Bitcoin holdings, and the situation is not a going-concern bankruptcy risk, but management must raise cash to cover dividends, interest, and near-term debt maturities rather than continuing to lever up. Each new preferred issuance transfers claims away from common shareholders since STRK primes common equity holders, and MicroStrategy may need to raise its preferred dividend yield to 12 to 13 percent. Quinn said his view has become more contrarian and he finds MSTR more interesting at current levels, though the situation becomes more critical if the stock trades into the 90s closer to liquidation value. The original thesis was described as sound because Bitcoin as collateral was a genuine innovation, but capital is now rotating toward AI infrastructure as the higher-returning asset, and the TINA framework that supported Bitcoin no longer applies given an abundance of productive investment alternatives.

Gold six-month put-call skew is near 10-year highs while CTA positioning in gold collapsed toward the first percentile on a one-year lookback, a striking contrast to photos of people lining up to buy physical gold just months earlier. Approximately 70 percent of the crypto space was characterized as scam and grift, with excessive capital misallocation from 2020 to 2021 identified as the root cause of current industry problems. Passage of the Clarity Act was identified as necessary before the sector can be properly sorted. The post-2000 dot-com bust was cited as the analogous historical pattern, where most projects died and a few survived, and crypto is expected to follow the same trajectory.