‘Twas The Night Before Fed Day…

By Peter Tchir of Academy Securities

Maybe it was being in Europe, with a particular shout-out to Zurich for putting me in a holiday mood. Academy also has our holiday party this week, which I’m looking forward to, though I’m not sure why I thought guest hosting Bloomberg TV at 6am the next morning would be a good idea. Or maybe it was the daunting task of needing to write about something that I didn’t feel passionate writing about (knowing that it would be about one out of a thousand Fed write-ups hitting your inbox in the next 48 hours didn’t help the motivation level). Or maybe, I was just jet lagged, lazy, and felt that we covered some of the groundwork in last weekend’s The Santa Rally Recipe.

If I was to do a serious report, in as few words as possible, I’d go with:

• Market is pricing in a 95% probability – the Fed won’t disappoint.

• Powell is as close to being a lame duck chair as we’ve seen, so nothing he says will carry much weight into the new year.

• I think the market is still underpricing:

  • The level of coordination we will see between the Treasury, the Fed, and the admin.

  • The “out of the box” thinking we will see in terms of tools implemented and even the shaping of the Fed to try to achieve my interpretation of the stated goal of 3-3-3 (3% growth, 3% front-end yields, and 10-year bond yields with a 3 handle).

If I was to do something for fun, maybe a bit aggressive and tongue in cheek, I’d go with:

‘Twas the night before Fed Day, when all through the bourse,
Rate cutters were stirring, ready to open the purse.
The voters in revamped Eccles were afraid of a stock market bear,
But, had high hopes that the Santa Rally soon would be there.

The vigilantes were nestled all smug in anger with the Fed,
While visions of much steeper curves danced in their heads.

With Powell at the podium, about ready to rap,
Reporters were left wondering if markets would give a crap.
When out on the South Lawn there arose such a clatter,
The media sprang up to see what was the matter.
Away to the window they flew like a flash,
Clicked on their phone camera shutters, to witness a great clash.

The spotlight fell on the newly named chair,
Who argued that the hawks didn’t have a prayer.
When, what to my wondering eyes should appear,
But a shadow chair, with a team of new voices to hear.
With the new driver, sent from crypto heaven,
We knew in a moment it must be Kevin.
More rapid than hawks his doves they came,
And he whistled, and shouted, and called them by name.

“Now QE! Now Operation Twist! No time to waste!
On Yield Curve Control! Get ready as markets might get a taste.
To the top of the chart! Up Main Street along with Wall!
Now buy every day! Buy away! Buy away all!”

The vigilantes did grumble, the “new” Fed basking in their cries,
When the admin meets an obstacle, they send markets to new highs.
So up to the White House – the doves, they flew,
With the sleigh full of tools, willing to use them too.
And then in a twinkling, I heard on the roof,
The prancing and speaking and even a little woof.
The bond markets were strong, especially in the belly,
Vigilantes shook with rage, arguing that this was all very smelly.

Bessent, with a wink of his eye and a twist of his head,
Soon let us know we had nothing to dread.
He spoke a lot of words, and went straight to his work,
And filled all the bulls stockings, giving the economy a newly found perk.
But I heard him exclaim, even as they never left our sight,
Happy Santa Rally to all, and to all a good night.

My apologies to anyone whose sensibilities I offended (it was meant to be fun) and even greater apologies to those who realize I got bored and eliminated a few stanzas.

In any case, while a bit “over the top,” it more or less fits with my “serious” take, and leaves me with the following bond market outlook:

• 3% or below on Fed Funds by the June 2026 meeting at the latest.

• Steeper yields curves (2s vs 10s are currently at 57) but not so steep that the 10-year doesn’t manage to trade sub 4% (thinking 3.6% to 3.8% seems reasonable).

  • There could be some periods where longer bond yields go higher, but I expect quick and decisive action to try to fight those moves.

War and Peace

Ukraine and Russia keep agreeing to peace deals with the U.S. Unfortunately, the deals that Ukraine agrees to and the deals that Russia agrees to don’t look much alike.

The road to an actual peace deal seems to end in one of two ways:

One side gains ground in the war in the coming months (most likely Russia) causing the deal to look more like what they have agreed to in principle.

Europe does something aggressive:

• Sanctions (including aggressively enforcing the sanctions in place and stopping the loopholes being used, many quite blatantly).

• Military support like we haven’t seen (seems highly unlikely, if not impossible).

• Making a grab at Russia’s frozen reserves (this is what I would do).

In Venezuela, we expect actions to continue to ramp up. While there isn’t an “expiration date” on the USS Ford, there is a sense of urgency to use its capabilities sooner rather than later (it is due for dock time and is very expensive to maintain, especially in a body of water that is relatively small for a carrier group to operate in).

We continue to see three main reasons why the U.S. is so focused on Venezuela:

• It sends a statement to our adversaries. Putin and Mexican Drug Cartels are high on that list.

• A serious effort to “fight the war on drugs” while also refocusing our policy on a North/South alignment.

• Oil. From what we’ve seen in the Middle East and in various proposals for Russia and Ukraine, the admin is likely eyeing access for America and American companies to Venezuela’s oil riches.

What does China make of all of this?

China has been very quiet on the Russia/Ukraine front. How quickly will they embrace a solution where the U.S. is granted vast access and potentially special treatment in Russia? Xi and Putin have had more photo ops than the Kardashians – so they may have a say in what Russia does in the event of peace.

While China has not created any new, far reaching pacts with Venezuela (the way they have with Russia), they have been very involved in the oil production there. Will they readily hand over all further development and control to the U.S.? (Assuming we are correct that this is one of the conditions the President will push for).

Bottom Line

The list of issues that the market needs to deal with have not abated:

• Valuations and the direction of AI tech and spending.

• Electricity generation bottle necks.

• Supply chain risks, especially as the trade agreement with China remains nebulous.

• How markets will react to potential changes at the Fed (you know my thoughts).

• Will rising bond yields in Japan impact bond markets globally? Especially, as recently, we are seeing a strong yen along with higher bond yields – not great for the “carry” trade. In addition to the outright yield being a question mark for global bond markets, the spread between the Japanese 10-year and the U.S. 10-year yield is down to 4.2%, the lowest since early 2022. That too could impact markets.

• The shape of the consumer. The health of the consumer. Whether the market is K, k, or i-shaped is a discussion that is occurring with greater frequency – please see What Shape is the Economy from late September.

Having said that, at the risk of being “complacent,” I don’t think real fear creeps back into the market until later this year, or early next year – seasonality is real and the easing of financial conditions seems real as well.

Looking forward to a potentially interesting week, and my view on the Fed’s likely decision is that it isn’t necessarily what I would do, but it is what I think will happen.