Friday Chart Book

Parody vs Credibility

It’s always great to remind ourselves that we are merely here to observe and decide, rather than judge and get emotional about things in markets that we can not control. One such emotional spike was observed on Wednesday, amidst official sources proclaiming that people are working behind the scenes to fire Jerome Powell. Markets reacted violently to the news that, frankly, shouldn’t have surprised anyone. Anything goes with Trump at the helm. Whether he means what he says is a completely different matter.

I laughed at the resulting market reaction and faded pretty much all moves, especially in FX, where the USD rebound seems to have some decent strength left to clear out positions, while plenty of USD downside option gamma will likely squeeze out positions as time passes.

Why would Trump fire Powell? We all know he wants lower rates, but no objective person would argue that there is a necessity for immediate rate cuts. The baseline Taylor rule model (see below) would also argue that rates should not move lower given the current context, despite indicating that in “theory”, Fed Funds should be 2 whole percentage points higher!

For a deep dive on Taylor Rules, please see my post on inverse optimal control policy.

Firing Powell would be a miscalculation by the President, in my view. It would not only trigger a likely volatility event and hurt institutional credibility ingrained in the USD and Treasury debt, but would also see the start of a likely messy legal battle, which nobody really wants.

Also, Trump needs a fall guy. So far, the US is doing ok, nominal growth is humming along (see below), and stocks are at all-time highs. Powell has also done an ok job, given the circumstances and let’s not forget he is a Trump nominee. His credibility is intact, regardless of the president’s attacks. Still, this parody will likely continue and cause many to anticipate what a likely rate structure will look like when a pro-Trump Fed dictates interest rates.

The SOFR M6 (June 26) skew is firmly to the call side, with an SFRM6 97.50/98 call spread (roughly 100 bps lower from current pricing) giving you a 10:1 payout on such an event. Anything is possible.

Source: Pricing Monkey

Meanwhile, US nominal GDP using my measure is running at 5%, precisely where US 30-year yields are trading. Bond markets are not panicking, despite what pundits are saying. Additionally, record tariff revenues will prove beneficial for the deficit.

Equities are tracking higher as resilient growth and solid earnings continue to support the trend, although it is somewhat losing momentum (see chart pack below). Tariffs, as I have commented previously, are still to come, yet markets are shrugging them off as an afterthought for the time being.

I think there is potential for a bit of a wake-up call for markets, which are seemingly oblivious to the risk that current negotiations are not going well and that Mr. President feels emboldened to hit countries a bit harder. Time will tell.

Let’s now read some of Macro D’s latest thoughts on inflation, Trump & Bailey, before we go through all 250+ chart setups across Rates, FX, Commodities, Crypto, Stocks, and ETFs.

Enjoy a fantastic weekend!