If you missed this week’s Around The World, it makes for great reading while waiting for the Fed decision and presser later today. Iran, the Houthis & Saudis, Cuba, Russia/Ukraine, Ethiopia and Eritrea (that’s a new one), and the Trump/Xi meeting at APEC are all covered.

Since we started with the Geopolitical side, results so far out of Israel show Netanyahu with a lead. Not enough to form a majority, but enough that he could be given a mandate to try to form a coalition government. This is important, as Academy’s Geopolitical Intelligence Group believes Netanyahu is more “all-in” than other potential leaders on taking additional steps to destroy Iran’s military (and nuclear) capabilities and will possibly even try to force regime change.

On that front, look for the U.S. posture in the Middle East on the military front to increase as we move towards (and past) the U.S. elections. Sanctions and the blockade are taking their toll on the Iranian economy. Will another military campaign (or the threat of one) be enough to get a “real” deal? It seems plausible, which is one reason why I think the Fed should be on hold.

Before moving to the Fed, let’s follow up on this weekend’s T-Report – Cheap But Getting Cheaper?

The SOX index has “dutifully” bounced off its 200-day moving average. Domestic earnings helped and SK Hynix (up close to 8% as I type) is also helping. We have major U.S. earnings announcements coming up. The earnings always seem to help, then doubts about AI creep back in (the profit potential, the costs, etc.), so this bounce seems well within the “norm.” ANT is out there with its IPO, which so far also seems to be supporting the market. Of all things though, Meta has played potentially the biggest role. They decided to tap equity and convertible markets, taking pressure off of the credit markets. On the day of the announcement (I think it was just Monday morning, which seems like a long time ago), their stock even responded positively, which is really encouraging. It has faded a bit since then, but if equities can take some of the pressure off of the credit market for the financings, and the dilution doesn’t have a major impact, we could be in the midst of an interesting plot twist.

From Toronto this morning, we had a quick interview with Bloomberg TV where we got some pushback on some of our thoughts, especially around the Fed.

No hike today. There really is little reason to hike today:

• The market is giving them a pass (not pricing in a hike). As a contrarian, I do like the idea that it would be “interesting” if not “epic” for Warsh’s Fed to hike when the market says no. I don’t think we’ve seen a Fed willing to go against the market in a long time. There is an appeal to that. It would also put “forward guidance” to rest, as the main reason we are not pricing in a hike is due to forward guidance from some Fed speakers. I appreciate the “beauty” of a hike, but don’t think they will.
  • 30-year Treasury yields are back to where they were in early September. You could argue that the market likes what the Fed is messaging, so don’t rock the boat.
  • Credit spreads, especially for the compute-spend names, have widened. Maybe we can put this in the category of “the market is doing some of the Fed’s work.” The juxtaposition between seeing lower 30-year Treasury yields (a good sign) and wider credit spreads doing the Fed’s work is a bit awkward, but what the heck, let’s run with it.
  • Inflation remains a concern, but… Argue that the Fed wants to see where things are heading, that some recent inflation expectation measures have improved (or at least been stable) and finally, I think most importantly, argue energy costs are a big driver and they are a function of war, not Fed policy. While peace deals seem unlikely, it seems to make sense to wait and see if anything happens in the next few weeks in Russia/Ukraine and with Iran. Yes, oil prices, but more specifically diesel, will remain elevated for months even after a deal, but the Fed should be willing to look past that. Maybe this is a bit weak, but I think it makes sense.
  • Housing data continues to be soft, with the NAHB coming in very weak. Committing to big expenditures (like a home) requires a degree of confidence in the stability of your job and income (as well as rates and cost). Little sign of strength here, and it is something the Fed could point to as a reason to hold off on rate hikes.

3 hikes between now and next September is too many.

I don’t think we see the 3 hikes currently priced in. Will Warsh do anything to try to get the market to see that today? I doubt it, but my expectation is that there is a better chance of fewer rather than more rate hikes being priced in by the end of the day.

While we haven’t focused on the Big Beautiful Bill, many of the benefits (and costs to the government) were front-loaded. As we head into the new year, will we see a touch less growth, and an improvement on the deficit as some of the biggest growth-oriented portions of the bill run off (or get smaller)?

Probably not part of today’s discussion, but maybe it should be?

Sadly, still doesn’t seem like we are ready to learn much on my favorite Fed subject – alternative data sources, but one can only hope. 😊

It would be “fun” if Warsh surprised markets, but I doubt he will (unless the surprise is he somehow comes out less hawkish than last meeting).

As we get through tech earnings, it will be really interesting to see if the “how are we going to fund it” narrative changes meaningfully, on the back of Meta’s lead.

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