If Biden Wanted To Leave An Easter Egg For Trump, The Dock Workers’ Deal Ending On January 15th Seems Like A Nasty One

By Peter Tchir of Academy Securities

Messy But Manageable

Last weekend we went with 2025 Will Be Messy. We discussed that subject and the implications on Bloomberg Radio/YouTube (30-minute mark) to kick off the year on Thursday. Unfortunately, Academy also had to publish a SITREP – Terrorist Attack in New Orleans.

We did get some volatility as stocks sold off into the New Year. While assets tried to bounce on the first day of trading, that momentum faded. However, at least stocks (and Bitcoin) performed well on Friday (which, technically, is the last official day of the Santa rally, which the Grinch did seem to hack).

What was noticeable about Friday was how well stocks did after the Speaker was picked on the first vote. While there were some delays as “cloakroom” deals were hammered out (which brought back memories of Hamilton’s “The Room Where it Happens”), the whole thing went relatively smoothly.

Markets were prepared for more of a “mess” (than what actually occurred), and rightfully did well as optimism that the positive things for the economy (and markets) will get done.

The expected deluge of corporate bond issuance got off to a fast start with 10 issuers coming to market on Thursday! (Academy was an underwriter on 5 of those deals).

There are a few important things to watch this coming week, which should move markets in a meaningful way.

Treasury Yields

We raised our near-term target on 10s to 4.75%. With the 10-year and 30-year auctions this week, that should put some pressure on Treasuries. With a very heavy corporate calendar, there should be rate hedging and buyers who prefer corporates to Treasuries (which will also tend to push yields higher). Finally, nothing about this administration (despite D.O.G.E.) points to it being fiscally conservative, so that too will weigh on bonds (yields drifted higher as the Speaker vote proceeded relatively smoothly).

In terms of “only” 1.5 cuts being priced in for 2025, that is starting to seem low, but we are not really prepared to argue against it too heavily one way or the other (basically our higher yield call at the longer end is primarily linked to further steepening of the yield curve).

Jobs versus Inflation

This is Jobs Week (nowhere near as entertaining as Shark Week). We get JOLTs, ADP, and NFP. Consensus is that the reports will be mediocre at best (160k estimate on NFP headline). If anything, the “whisper” number seems even lower. While that is completely in line with our take on the economy, there are two main reasons why we are not prepared to bet on the jobs data being weak enough to really move the needle for the Fed:

• The Household number (used for the Unemployment Rate) has been significantly lower than the Establishment number, so there is some reasonable probability that the data will catch up, keeping the unemployment rate well under control.
• We have argued that the seasonal adjustments, while “normalizing,” are still off due to including Covid and are not adapting rapidly enough to the importance of weather in the South versus the North. Just like last year, we believe that there is a bias in the seasonal adjustments that can create a “beat” in the jobs data.

While some have argued that the Fed may have acted politically at their last meeting, we are NOT in that camp (A Tough Powell Who Didn’t Take the Bait). We are far from convinced that the economy is robust or that the job’s data reflects reality (we think that it has consistently overstated the strength of the labor market – which the ongoing downward revisions seem to support). But the Fed is somewhat forced to work with the official data.

But the main reason why we were calling for the Fed to do what they did is concern about inflation.

We highlighted the almost comedic healthcare “deflation” stats in the CPI data! The Fed uses those numbers, but that is possibly the single biggest reason why no one in the real world (or at least the world where you need to have health insurance) is as happy about CPI coming closer to 2% as the economists would have you believe.

With respect to whatever is going to happen on the tariff front, companies have been purchasing goods ahead of the potential risk. We do think that the risk is now higher than the market believes, primarily because China did not buy the agricultural goods they promised to buy last time, and President Trump will not let that happen again on his watch. The logical reaction by companies and the underestimated risk of tough trade talks will add to inflation pressure.

Video games often include “Easter Eggs.” Little hidden things left by the developers for the gamers to find. Well, if President Biden wanted to leave an “Easter Egg” for President Trump, the temporary dock worker’s deal ending on January 15th seems like a potentially nasty one. There was a time when people were concerned about the impact that the strike would have on the economy and inflation. That has largely gone away, but with the use of automation being a contentious point, it could come back. With Musk (and some other members of the Trump team) being so clearly for automation, robotics, etc., this could get messy. Also, it did seem that the Steel Workers union was happy about the U.S. Steel deal getting shot down. While a completely different issue, I cannot help thinking that it should be viewed as at least a small warning from the unions and could impact things like the dock workers.

The inability to get inflation closer to 2% is likely to remain a theme (the Atlanta GDPNow estimate for PCE has been back above 3% for the last month).

We are looking for data and narratives that:

• Inflation is not only alive, but it is also possibly rising again.
• Jobs, while not robust, are not weak enough to compel the Fed to cut.

I fully expect that in the coming months, we will be calling for more rate cuts than the market has priced in, but it is premature to move in that direction.

Bottom Line

With Bitcoin as a useful signal, we expect “risk on” type days when it looks like the Trump administration will be able to accomplish a lot, and “risk off” days when it looks messier.

If we are correct on rates, then stocks will likely have trouble continuing the rally that actually started late into Thursday’s trading.

We are watching not just the inflows into option-linked ETF strategies, but also the dominance of leveraged long ETFs. We’ve seen reports that the leveraged long ETFs have 100 times the AUM of leveraged short ETFs. We haven’t verified this, though we’ve been harping on the single stock leveraged ETFs theme for a while. It is true that TQQQ (3x long QQQ) has $25 billion of AUM versus $2 billion in SQQQ (3x short QQQ). These leveraged ETFs contain significant drags for their holders (they have to buy more shares at the end of up days and sell shares at the end of down days) and have the potential to significantly amplify larger moves.

Between those categories of ETFs and the ongoing dominance of short-dated options (0-days-to expiration, etc.), we expect to get moves that are larger than they should be based on the data. Not a great market structure issue in a world where we expect messiness (if not chaos).

We will be following up with our take on how the geopolitical landscape is likely to influence markets, with a focus away from the “Big 3” (China, Russia/Ukraine, and the Middle East). Thanks again for all the support in 2024! We hope that 2025 is great for everyone and we are looking forward to working together in 2025!