Thank you!! :)

Very well said! I think, not just Liberation Day, but the events leading up to it - VP and others bashing allies in a “we don’t need anyone else” approach - have shaken the belief in Pax Americana. It’s been a surreal couple of months that ultimately culminated in Liberation Day.

lol!

Thank you Sir!! Will try to be more active here!

Second, Waller seems to assume 2% productivity growth. This is crucial as it allows us to judge wage growth as hot vs not.

These two points highlight why Waller's dovish and also add to our framework for analyzing their reaction function in the future.

This explains the confidence behind 'we have a ways to go to neutral' and also why they don't regret the 50bps cut in September even though it seems like there was no urgency after all.

I personally think neutral's closer to 3.5-3.75, but who really knows? But I do think the next 2-3 cuts are easy.

Two interesting bits from the speech that I liked:

First, the gap in performance of the interest rate sensitive sectors such as manufacturing of business equipment vs the rest of the economy is an indicator of how restrictive policy is - aka, how far we are from neutral - for Waller.

Base case is a hawkish 25bps cut unless data surprises violently on either side. The rate path for 2025 depends on their estimate of neutral (more on this). I think they should pencil three cuts for next year, which should be consistent with cooling but steady job market and moderating inflation.

So, if the labor data is weak this week, the cut is automatically justified, but if it’s strong, its not entirely ruled out until the CPI - which prints during the blackout period is known. Only if CPI is hot enough to stoke fears of reflation, the Fed skips December. Asymmetry is intact!

Nice thread. Thank you!!

That's not enough by itself, but as long as the reflation tail is under control, bonds look attractive to play slower hiring, especially vs swaps.

Holiday week, and Trump is back, so expect swings on headlines. Trade carefully.

8/8

But like I said earlier, Bessent doesn't control much. Neither tariffs, nor deficits are up to him. The only thing he controls entirely is the WAM of US debt (more on this later) and perhaps things like lifting the Wells Fargo asset growth cap.

7/8

A year later, it may seem like Bessent was the reason why 10s rallied 50bps in 6 weeks. But market implied neutral rate is high and ASWs are tight enough to trigger a rally on soft data, especially when the Treasury Secretary is talking about reducing deficits and deregulating banks.

6/8

I believe, if we manage to hold this bid in US rates this week, then we are set up for a reversal of the post SEP FOMC sell-off starting December. We'd need a soft payroll number and neutral rate estimates go back to 3.5%-3.75% allowing the Fed to cut 3-4 more times.

5/8

Therefore, every time a government changes now, there is a "Kwasi" premium that the long end needs to price. Bessent being a self proclaimed fiscal hawk led to an unwinding or that premium, hence the rally. Him not wanting to fight Powell also helps.

4/8

In fact, for the longest time, it was one of those positions which only bond nerds would talk about. But then came the legendary budget in the UK in October 2022, and Kwasi Kwarteng proved to the world, that there was indeed such a thing as a "responsible" Treasury Secretary.

3/8

A lot of ink spilled on what his views are, what he's likely to do, etc. I'll write more about this in the coming days, but my (somewhat unpopular) view is that the Treasury Secretary doesn't actually control all that much when it comes to things most people care about.

2/8