This Week’s Fed Meeting Is Barely On The Radar Screen

By Peter Tchir of Academy Securities

It is unusual to say that I don’t really care that much about the FOMC meeting, but I don’t. Everything seems incredibly well telegraphed coming into this meeting.

• Markets are pricing in a 93% chance of a 25 bp cut. We will get it.
• Markets are pricing in an 87% chance of no cut in January. We won’t get a cut.

The Fed tends not to deviate that much from market expectations, and the next two meetings appear pretty cut and dry right now, without some unforeseen large data (or geopolitical) surprises.

The hawkish sentiment expected is appropriate:

• The only real weakness in the jobs data recently has been in the often (and rightfully) maligned Household Survey. The margin for error in the Establishment Survey is big enough to drive a truck through it, and the Household Survey margin for error would let you drive a tanker ship (while blindfolded in rough seas) through it. The two surveys often deviate, significantly and over extended periods of time, but if we get any “normalization” we should see unemployment rates decrease in the coming months.
• Inflation is proving to be sticky. As companies purchase inventory ahead of potential tariffs, we will see inflation remain sticky. Many investors and business owners are seeing the surge in NFIB Small Business Optimism (as one concrete example) and we are likely to see people prepare for that growth, which should keep prices elevated.
• Seasonality. We have argued that the seasonal adjustments have been off for two main reasons:
  • Shifting demographics. Basically, any upward adjustment for construction in the winter to account for Northeast slowdowns is erroneous now that the bulk of construction has shifted away from that region.
  • Including COVID-era data. The timing of COVID lockdowns and re-openings has been included in the data and tends to create adjustments that overstate the strength of the economy in the winter and understate it in the summer.
• So seasonal adjustments should contribute to (artificially) higher inflation and jobs data in the coming months. It won’t be as impactful as last year, or the year before, but it will be a factor and will “manufacture” or “create” data that keeps the Fed on the sidelines.

Even the Neutral Rate seems to have settled into around 3.75% towards the end of 2025, which is hard to argue with (I think it should be 4%, but that would be quibbling since we had the move from 2.875% over the past few months). Nothing the Fed says at this presser is likely to move the needle on the neutral rate, since I think they had every intention of getting the market to price it higher, and they have been successful.

Drones are the 1st Thing I Search For (mostly on X and news sources, not the skies)

Drones, especially the ones that have been over New Jersey for weeks (but are apparently being seen elsewhere), have become fascinating. Even President-elect Trump tweeted about them (though I’d be shocked if he hasn’t been briefed, or at least had the opportunity to be briefed).

It is fascinating and makes me think a lot about Twilight Zone episodes (just in time for hopefully some Twilight Zone marathons during the holidays).

Academy’s Geopolitical Intelligence Group has been discussing them, but so far, nothing conclusive is emerging, which again adds to the “Twilight Zone nature” of this drone phenomenon.

As we get info that can be shared (and we have a high degree of faith in its accuracy), I’m sure we will send out a SITREP, but in the meantime, everyone is left speculating. However, while the rough consensus is that these are almost certainly ours, we aren’t really sure why the details aren’t being released (especially when there is so much curiosity).

Some Trump 1.5 Pleasant “Surprises”

Two things struck me as very interesting in the past week. I would say “out of character,” but they aren’t really out of character once you think about them.

Inviting Xi to the inauguration. Given all the rhetoric about China, unfair practices, tariffs, etc., it was easy to be surprised by this invitation. But that’s only because “we” forgot to account for how much Trump believes he can influence people in personal meetings. It is very interesting, though in the back of my mind, this time seems “different.” According to a few of our GIG members, he feels strongly that Xi failed to live up to promises on the purchases of certain agricultural products.

Getting rid of Daylight-Saving Time. I don’t think it was a campaign promise, but who doesn’t agree with the idea of keeping it lighter later in the day? Let’s remember not to forget that Trump wants people to like him, so why wouldn’t he embrace something that very few people would seem to disagree with (and I really can’t think of the reasons to disagree with this).
In the meantime, while President Biden is still the president and making headlines of his own, it is pretty clear that wherever possible, people have moved on to positioning themselves for the new Trump administration. Hence our use of the term – “Trump 1.5.”

I still expect some “chaos” as Trump thrives (or believes he thrives) in chaotic environments and things seem to be a little too complacent right now.

How High Can Yields Go?

While I don’t care that much about this week’s FOMC, I do care a lot about where longer dated yields are headed.

• I haven’t liked how the moves to higher yields have generally been unidirectional (if that is a word). Despite all the positive messaging from DOGE, there is renewed concern about the path of the deficit.
• I did enjoy Treasury Secretary Yellen expressing “regret” that they didn’t do more to contain the deficit, since it wasn’t very apparent that any time was spent on trying to control the deficit. Until the voters make it clear that the deficit scares them (and I don’t really think that was part of the message that voters sent at this election), both sides will continue to spend, because it generally helps them.
• If we are correct on inflation, jobs, and seasonal effects, there are some more problems out there for the rates market. We thought 4.4% and higher in the aftermath of the election was overdone and highly susceptible to a short squeeze. I don’t see that right now (and we haven’t seen it since it was at 4.2%). If anything, while we have been steadfast that the risk of a gap higher of 50 bps is far more likely than a similar gap to lower yields, we must take our range up to the 4.4% to 4.6% area on 10s.

Bearish the longer end of the yield curve (10s through 30s), though we will see how the market responds here to what seems like resistance.

Refine Baby Refine

While guest hosting on Bloomberg TV Tuesday morning (link), I was able to ask Ellen Wald (an energy expert) about not just “drill baby drill,” but also about refining (starts at the 36:25 mark).

Her response fit perfectly into a couple of our themes:

• We need to not just focus on the extraction of commodities, but also on the processing!
  • She did say that “Refine Baby Refine” would be a more important goal for the U.S. (citing that under 20% of the Strategic Petroleum Reserve can be refined in the United States).
• Challenging NIMBY (not in my backyard) and reviewing regulations that were put in place when we were the sole superpower (economically and militarily) and the world seemed to be on course for further globalization, rather than deglobalization with a series of hot wars!

I think that betting on infrastructure and anything critical that we are required to extract from the earth (and process), especially in areas of importance to the nation’s ability to be independent of foreign suppliers, will do very well in the coming year. Yes, the stock market is all about a handful of stocks again, but we think that this thesis will be our biggest recommendation to start the new year.

Crypto

We spent time on this in last weekend’s The Genius of Mariah Carey, but I think I have underestimated how much higher this can all go.

• The donations were so big and so one-sided that they definitely contributed significantly to the win. That is unlikely to be ignored. The wealth being created in the crypto space allows for even bigger donations going forward. I had thought about that, but was convinced by one of our advisory board members that I was heavily underestimating the power that this donation base currently provides to the administration. It does seem a bit like a Twilight Zone episode, but it is a convincing argument (and the administration is filled with crypto advocates).
• Trump can control it. We’ve argued that Trump likes things that he can “control” and if his goal is to have it go higher (and that appears to be his goal) then he certainly can do a lot to make it go higher. He can probably do a lot more to move the price of Bitcoin significantly (in a direction of his choosing) than he can with the dollar! While I think over time he won’t have that connection, I’m probably wrong that the timing is any time soon.

Not sure I can make myself buy up here. Virtually every historical use case has failed, except that now the “limited supply” theme seems to be helping it rise. I have to admit, the “digital gold” rebranding is also interesting as advocates beg big governments to adopt it as a reserve asset.

Maybe I can convince myself to add some ETH to the portfolio? Logically I struggle with the value proposition, but this market has always been about flow and adoption, and it seems to be on their side right now.

Bottom Line

The FOMC will be boring, but that won’t stop 10-year yields from rising further.

Stocks have had almost no breadth, we’ve seen some valuations hit extreme levels, and we just had the Nasdaq 100 rebalancing announced, etc., but it is difficult to fight especially when a major player in the chip industry can still surprise the market to the point that it had a record setting rise (for them) which was big enough to drag that entire sector of the market higher. As a contrarian, it is difficult to judge sentiment and positioning when so many people seem checked out, so keep looking for some trading ranges, and wait for a real “consensus” type of trade as we near the new year. I think (officially) the Santa rally starts this week.

I will “refine” the “refine baby refine” viewpoint as I do think that could be the best risk/reward theme out there, if we can identify it properly.

Credit, boring. I cannot say that I like it here and now, but spreads still seem unlikely to do much. I will stick to my argument that I do NOT like credit on an all-in yield basis, and investors should still be reducing their yield exposure, while corporations should take advantage of the ongoing window to issue more!

Crypto, feels like another pump and dump, but this pump seems like it could have a lot more legs to it.

Have a great week, and we can only hope that we find out what all these drones are up to sooner rather than later as, to quote Rod Serling: “So, if you’re ever feeling like you’ve entered a strange new world, just remember, you might have crossed into….the Twilight Zone.”