There are three main reasons why I don’t have a lot of “new” things to say:

• We’ve said and done a lot of things in the past week or two that I want to highlight, and I don’t want to risk those views getting lost in the shuffle.
• It seems like any day now we might have to “rip up the script” as the risk of escalation and expansion in the Middle East seems terribly high! Also, we are starting to enter earnings season, and I don’t have a strong opinion other than that the leaders are going to have to deliver extremely good quarters and equally rosy outlooks.
• Finally, it has been a long week! It started early with Bloomberg TV on Friday at 5:30 am. However, Why The Fed Will Cut 25 in November isn’t quite the label they gave the segment (their label was a bit more aggressive). We covered the Fed, China, and the Middle East from a military standpoint (leaning heavily on the work done by our Geopolitical Intelligence Group). That followed a very successful (inaugural) Geopolitical/Credit Roundtable in New York City on Thursday night and rolled straight into a weekend of college football! We happened to pick Tennessee vs. Florida this year, which was one heck of a game in Neyland Stadium, and after another Vanderbilt win, I took a lot of ribbing for not wearing a Vandy hat on TV on Friday (it isn’t very often that you can proudly wear Vandy gear during the college football season). Also, Army and Navy are undefeated and ranked in the AP Top 25! That is the first time since 1960 that they’ve been nationally ranked at the same time! Finally, somehow with all that is going on, Academy was quoted in an interesting article about Hedged-Up Wall Street Traders Still Haunted by August Meltdown.

Reminder on China Stimulus

The Chinese stimulus (which was “officially unveiled” on Saturday) was vague and continues to be at the smaller end of expectations. As discussed in China Stimulus Simplified, we expect this to be an iterative process. They will add/tweak to try to accomplish their goals – which are primarily to drive domestic consumption of domestic brands. We think the somewhat predictable sell-off on Tuesday after the Chinese market ended a weeklong holiday offered a buying opportunity for Chinese stocks and that the trade is just getting underway (despite a 35% increase in FXI since September 18th).

Inflation and the Neutral Rate

Last weekend’s T-Report focused on the three topics in the title – War, Inflation, and the Neutral Rate.

We’ve discussed the war in the Middle East a lot at Academy, and the Risk of Further Escalation Webinar from early October is still highly relevant.

But my focus is on trying to get some attention back on inflation. We wrote about it again on Thursday (post-CPI) in More on Inflation. Rates have been moving in our direction, with the 10-year at 4.1% (it is getting more difficult to remain bearish on rates here) and rate cut expectations have been hammered down to levels where we can almost get on board (have to go out to July before 5 cuts are priced in and the “terminal rate” seems to “only” get down to 3.26% in early 2026).

We are hearing more and more about the neutral rate, or terminal rate (I view them as somewhat interchangeable), as the Fed’s policy discussion shifts from starting to cut to how many cuts. 3.5%, which is my view of the bottom end of the range for the neutral rate, seemed almost preposterous a couple of weeks ago, but is now being mentioned by some important Fed speakers as being in their view of possible ranges!

The Election

It is getting more difficult to ignore the election as we are less than a month away, but I will manage to do it for this report. It is close, but “gridlock” still seems to be the base case and that is really what the markets are looking for. But, as we get more data from polls and betting markets, we can start realistically assessing what policies are pure campaign fantasy, versus things that have a chance of getting implemented (Schoolhouse Rock’s Today I Am Still Just a Bill is playing in the background as I type this section).

Bottom Line

It is very difficult to remain bearish on Treasuries here. 4% seemed high as a target on 10s and 4.2% seemed off the radar screen not too long ago. While it seems treacherous to be bearish here, there are a few things that are making it very hard to turn bullish:

• Inflation and the neutral rate are not helping bonds and both topics, if we are correct, could put pressure on bonds.
• We finished auctions of 10s and 30s, which should have been a good opportunity for markets to reverse course, but they didn’t. That seems peculiar and is probably what concerns me the most. We’ve argued that the debt ceiling and the election (actually, the realization that no matter what happens with the election, the deficit will rise consequentially) could weigh on Treasury yields. I am having flashbacks to the Autumn of 2023, when yields went higher virtually every day, marching from 4% to 5% without any “appropriate” reaction to data as it came in. While I don’t think we are in that sort of a world right now (the Fed has cut after all), there is something troubling about not getting a decent rally after the auctions.
• I’ve been wedded to the idea of 25 bps on 2s vs 10s, and while that is back to 14, it could still break through 25.

At best, I can maybe get to “neutral” on rates but think that when push comes to shove, higher yields are likely going to be the pain trade (which means we will probably get it).

Still extremely comfortable with credit. Will pound the table at the front end of the curve for higher quality credits. Anyone who is able should be heavily overweight credit versus Treasuries/T-Bills. At the back end, private credit and the need for banks to grow NIM will mean competition for lending to companies up and down the credit spectrum, which will help corporate bond spreads do well.

Equities. Another 1% up week for the major indices, with just a touch of weakness on Monday and some other intraday/overnight weakness that wound up being bought as the week closed out. I really like energy, China, and am eyeing small caps and value as the Russell 2000 did a little better than the S&P 500 and Nasdaq 100. Semiconductors did great, while utilities did poorly (more due to rates than questions about data center energy use, but those two sectors have been strange bedfellows this year). Banks have been doing well, but maybe it is time to bet heavily on CRE again?

Enjoy the holiday and thanks for all the time and support that you provide Academy Securities. And while it could be seen as a cop-out not to produce much new this weekend, I believe that it would be time well spent reviewing (or reading for the first time) the 3 reports highlighted in today’s T-Report!

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