PCE, Real Rates, and the Melt-Up Setup
How falling real rates, FX positioning, and the AI infrastructure rotation are setting the stage for what comes next
PCE, Real Rates, and the Melt-Up Setup
The geopolitical premium is coming out of the system and the market is now re-asking the question it was asking before all of this started: where are real rates going, and what does that mean for everything else? Today I covered the PCE data, the bond positioning shift taking place right now, why the FX market is already pricing the next leg in crude, and why the AI infrastructure rotation is about to become the dominant theme again. Below are the main talking points. Slide deck is embedded below. Paid subscribers get the full breakdown below.
LIVESTREAM RECORDING FROM TODAY:
Today’s Livestream: Main Talking Points
1. Real rates just made new lows across the curve and that is the liquidity signal everyone is missing. One-year and two-year real rates both printed new lows today. That is not a coincidence after an oil shock. The crude impulse ran through the system, inflation expectations rose on the short end, and now as crude retreats the Fed’s pause is creating a net liquidity injection even without a cut. When real rates fall and the Fed does nothing, money enters financial markets. That is the setup right now.
2. Stocks are outperforming bonds on the day and that is the pair trade. Long stocks short bonds remains the right expression in this regime. Inflation needs to make its way through the system still, which makes outright long bonds uncomfortable. But stocks can rally through it. You can already see ES making new highs intraday while ZN has not cleared yesterday’s high. That asymmetry is the signal.
3. Bond positioning just had a capitulation and is now rebuilding. CME open interest data shows a massive washout in ten-year note futures earlier this week, followed by new long positioning being rebuilt on Tuesday. Six and a half million DV01 of new longs across the ten-year contract. This means the market has already cleared the peak fear on rates. The setup is for rates to consolidate here, not spike further.
4. Long-term inflation expectations are falling, not rising. Ten-year and thirty-year inflation swaps have been declining even as short-end swaps moved up with crude. The market is telling you this is a supply shock with a time limit, not a new demand-driven inflationary cycle. That is why the Fed is not hiking and why positioning in the Z6 contract has flipped from pricing a hike back to pricing five basis points of cuts this year.
5. The FX market is pricing the next leg down in crude before it happens. Hedge funds are now using currency options on the South Korean won and Chinese yuan to bet on crude falling further. The dollar against the yuan has been moving in lockstep with crude for months. When that pair breaks to a new low, it leads crude lower. Watch dollar-yuan tonight. If it makes a new low, the crude unwind accelerates.
6. There is still massive vol premium in the crude options market to unwind. Implied vol in crude is still running at eighty percent. Call skew just spiked again at the lows as people re-leveraged into calls. That is a contrarian signal. If de-escalation continues, you could see crude vol crush from eighty back to sixty or forty in a session. Same dynamic that caused the gap up can cause the gap down.
7. Gold and silver are set up to rally as macro liquidity expands, not as geopolitical hedges. Gold’s sensitivity to real rates has dropped since 2024 and its drivers have clearly shifted to the quantity of money in the system. Put skew in gold capitulated at the exact low in March, the same moment FX put skew peaked. That was the bottom. Now as real rates fall and the dollar weakens, gold and silver rally on the liquidity injection, not the geopolitical story. This will confuse a lot of people. That confusion is the opportunity.
8. Industrials and materials outperforming tells you where the market is going next. Energy is down on the week but only contributing 22 basis points of negative return to the index because of its small weighting. What matters is industrials and materials leading, which reflects the second and third order transmission of the crude impulse into the real economy, and the AI infrastructure build-out starting to reassert itself as the dominant theme. EQIX just made an all-time high while the rest of the market was sitting flat. The largest data center REIT in the world making new highs with the highest fundamental attribution in its sector is the market telling you exactly where flows are going next.
SLIDE DECK
All charts and models from today’s stream:
Tradingview model quantifying the relative stock bond returns: https://www.tradingview.com/chart/pDBgSlBd/
Additional TradingView models:
https://www.tradingview.com/chart/kZ8JijHH/ (Models from my friend Alfie https://substack.com/@alfiekerswell)
If you don’t have a Bloomberg, the CME Tools are your best friend:
All the educational primers:
![[FREE] Educational Primers On Every Aspect Of Macro & Markets](https://substackcdn.com/image/fetch/$s_!tfas!,w_140,h_140,c_fill,f_webp,q_auto:good,fl_progressive:steep,g_auto/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F69c49472-3d63-47f0-9b8c-2a682fa625f1_1024x1024.jpeg)
Tomorrow: Capital Flows | The top stocks in each sector setting the tone for traders
Daily at 8:30 am MST
Tomorrow I am going through the names that are being bid by fundamental investors right now, not broad market beta. When the whole market sells off and certain stocks hold or make new highs, that is informed money telling you something. I will walk through the attribution model, break down which sectors and single names are showing the highest fundamental signal, and explain exactly what that means for how you should be thinking about positioning over the next 30 to 60 days. This is the why behind the market move that nobody is mapping in real time.
LIVESTREAM LINK FOR TOMORROW: LINK
Macro Liquidity:
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