Alpha Report: The capitulation

Macro volatility

Macro Context:

In April, we saw equities at lows and bonds at highs as expectations were extrapolating price action into an imminent recession. This was not simply a positioning unwind where we can carry on as if nothing happened. Price action in interest rates has been sowing the seeds for higher inflation and higher rates on the long end.

There are now two elements that have hammered the nail in the coffin for the US bond market: 1) The geopolitical risk pushing oil prices up, and 2) The Fed’s inaction that is causing them to fall behind.

If we correctly understand the context for WHY we have seen the price action YTD then we can understand WHERE we are likely to go.

---

Geopolitical Risk:

It has been clear to everyone that the higher crude prices are going to push headline CPI up. The bigger issue is that this is overlapping with core CPI coming in marginally higher over the next 2 prints. Even Powell noted this in the last FOMC meeting.

On top of this, we have the Atlanta Fed GDPnowcast projecting growth above 3.4% as 1 year inflation swaps are pricing 3.13%. The implication is that this is not an environment where inflation prints are going to collapse and show massive disinflation.

Now, as of today, the geopolitical risk has decreased considerably:

• Trump announces Israel-Iran ceasefire (multiple confirmations on Truth Social, Fox News)

  • Ceasefire begins in 6–12 hours

  • “Officially Iran will start the ceasefire”

  • No Americans harmed; minimal damage

  • Trump: “Encouraging peace” and Israel should “also pursue peace”

• JD Vance (US VP):

  • “We want a direct conversation with Iran”

  • “Hope Iran won’t rebuild nuclear program”

  • “Need long-term settlement”

The result of this is that ES rallied and crude sold off aggressively.

---

Now this is the context in which understanding the Fed will be THE differentiating factor for moving into Powell’s speech tomorrow and understanding interest rates for the next 3 weeks.

---

The Problem: