A New Era Is Beginning In Markets | Weekly Roundup

Kevin Warsh's first FOMC meeting produced a dramatically shortened Fed statement with roughly 80 percent of prior text cut, ending only with the phrase "the committee will deliver price stability." Warsh did not submit his own dot plot, allowing the rest of the committee to drive the hawkish narrative. Speakers argue this hawkish posture was primarily a political signal designed to demonstrate Fed independence from Trump rather than a genuine inflation call, and that Trump, Bessent, and others still want rate cuts, making policy likely to become less hawkish than this week's communication implied.

The underlying inflation data supports a dovish turn. Oil is down 30 percent from the Fed's last dot plot when they pivoted and remained dovish. One-year inflation swaps have reverted to where they were when the war started. Wages have fallen from approximately 5 percent two years ago to 3 percent currently. Shelter costs, the largest CPI component, are running in the low ones by one private measure and low threes by government data. Core goods inflation was elevated due to tariffs, but tariffs are now effectively net zero, removing that pressure. Speakers expect headline inflation to be very low next month and anticipate July CPI and cooling labor market data over the next six weeks to confirm the disinflationary trend before the next Fed meeting.

The dot plot showed multiple Fed governors projecting hikes this year followed by cuts within under 12 months, which speakers describe as very abnormal behavior, attributing the hawkish dots primarily to non-voting Fed presidents. Only one of 19 committee members holds a more hawkish three-hike view. Fund category traders hold a record short position in SOFR, meaning most of the hawkish move has already been front-run. Speakers strongly believe peak hawkishness has been reached and that rates will not be hiked by end of this year. The two-year yield was at 420 basis points and backed off a couple of basis points after the meeting.

Approximately 85 percent of US Treasury bond issuance is currently on the front end of the curve. Bessent is attempting to term out US debt by engineering a flatter yield curve, and the US two-to-ten curve is already flattening as the long end rolls over. Speakers compare shorting bonds against Bessent to shorting against the person who broke the Bank of England on the pound. Most US mortgages are priced off the 30-year yield, so flattening the yield curve would lower mortgage rates, improve housing affordability, and reduce US government interest costs. Long end yield suppression has disproportionately benefited mega cap tech and the AI trade, while reducing long end yields would help housing and corporate bond issuance more than cutting short-term rates.

High yield credit spreads barely moved throughout recent market volatility, and the capex cycle remains intact. Data center capex is projected to grow from roughly 506 to 575 billion dollars to 860 billion dollars, though the year-over-year growth rate is dropping from about 80 percent to 45 percent. Goldman Sachs data shows money rotating out of hyperscalers and into AI bottleneck or beneficiary stocks. Hyperscalers have already tapped their cash flows and are moving to equity and corporate bond issuance to fund AI buildout, with SpaceX looking at a 20 billion dollar bond issuance as part of this phase. As long as high yield credit spreads do not blow out, speakers predict AI bottleneck stocks will continue to outperform.

A record 8.3 trillion dollars notional expired in the quarterly quadruple witching. The VIX was smashed after the Fed spoke, and vol targeting funds are expected to reallocate as volatility rolls off through the summer. Speakers predict a low volatility grind higher in equities through end of June and into summer, with real tests of Fed resolve unlikely until fall. Quinn notes it is easy to be hawkish when stocks are at all-time highs but the real test comes when inflation is above target and equities are simultaneously down 10 to 15 percent. Household cash as a percentage of total financial assets remains elevated, representing significant unallocated capital that could re-enter markets.

MicroStrategy is described as experiencing a liquidity crisis driven by management continuing to buy Bitcoin with share issuance proceeds rather than building cash to cover liabilities, service debt, and pay preferred dividends. The STRK preferred instrument primes common equity holders, meaning each new issuance transfers claims away from common shareholders, and the preferred dividend yield may need to rise to 12 to 13 percent, creating a growing cash drag on a business with no revenue. Quinn says MicroStrategy is not bankrupt yet, but that management needs to demonstrate the ability to cover several years of dividends, interest, and near-term debt maturities to produce a significant bounce across the capital structure. The broader thesis is that AI-driven productivity is pulling capital away from Bitcoin and toward centralized AI infrastructure, with Bitcoin framed as an asset that serves its purpose primarily when there is no real economic growth and governments are diluting currency rather than generating genuine productivity, conditions that no longer fully apply.