The Macro Perspective

Rotation Not Capitluation

Michael Brown — Fri, 23 Oct 2026 19:43:00 GMT

Yet again, folk are missing the point.

What we’ve seen over the last few weeks has not been ‘risk off’. It’s not been ‘deleveraging’. And it almost certainly hasn’t been the ‘top’ in equities.

Instead - and, I know this isn’t a clickbaity line that will get clicks - it’s just been a good, old-fashioned sector rotation.

Look at the S&P compared to the Nasdaq, for instance.

Or, the S&P compared to the small cap Russell 2000.

Or, even, just a view of the performance of each S&P sector this year.

Quite obviously, what we see is an environment where participants are trimming their exposure to the megacap tech names, and instead allocating increasingly to other areas of the market.

This is no bad thing!!

Actually, it’s quite the opposite. Look at breadth, for instance, which has markedly improved of late, with there now being well over half of stocks in the S&P trading above their 50-day moving averages.

Of course, the issue here is that with the SPX being so tech-heavy these days, you end up in a scenario where this significant sectoral churn results in the index going nowhere at all. Still, that probably speaks to the resilience of the market at large, given that the S&P is practically flat over the last 3 months, despite the 10-year yield having climbed 40-odd bp over that period.

So, short of being bearish, I’m quite the opposite. The US economy is going gangbusters, and earnings growth is ripping. Geopolitical jitters remain and may cause some near-term turbulence, while Fed tightening is another perennial worry, yet one that the economy looks able to withstand for now.

Does ‘buy the dip’ sound like a broken record? Yeah, it does.

But does it work? Yes. And, it’s still a strategy that I’d be advocating. The path of least resistance for equities is still one that leads higher.

Disclaimer

The information and opinions contained in this publication are provided for informational and educational purposes only and should not be construed as investment advice, a recommendation, or an offer to buy or sell any financial instrument.

All views expressed are solely those of the author and are subject to change without notice. While every effort is made to ensure the accuracy of the information presented, no representation or warranty is made as to its completeness or accuracy.

Readers should conduct their own research and, where appropriate, seek independent professional advice before making any investment or financial decisions. The author accepts no liability for any loss arising from reliance on the information contained in this publication.

Any references to specific securities, asset classes, markets, or investment strategies are provided solely for illustrative and analytical purposes and do not constitute investment recommendations.

August UK Jobs Report Provides False Reassurance

Michael Brown — Tue, 20 Oct 2026 06:30:00 GMT

Another all-timer from the ONS this morning, where the headline data paints one picture, yet the details tell a very different story.

Headline unemployment fell to 4.7% in the three months to August, from 4.9% in July, which looks fairly promising at face value.

The only problem is, this decline in joblessness almost certainly didn’t happen, and is yet another reflection of the ONS’ inability to produce accurate statistics on the UK economy.

Digging into the report, one sees that the single-month unemployment rate fell from an estimated 4.9% in July, to an estimated 4.3% in August, thus dragging the three-month rolling figure lower, as outlined above.

Such an 0.6pp decline in joblessness in the space of just one month, however, is entirely implausible. Some rather quick ‘back of the envelope’ maths suggests that for such a decline to be legitimate, assuming the labour force remained at a stable size, the economy would’ve had to have added 200,000 jobs in August alone! The UK economy hasn’t added that many jobs in a single month since the recovery from the pandemic over five years ago.

Worse still, the ONS’ own data tells us that such a surge in hiring didn’t take place. In fact, per the latest PAYE payrolls data, employment rose just 1k (yes, one thousand) in August. Even by the dismal standards of the folk in Newport, being out by a factor of 200 must be a new low.

Anyway, it wasn’t only the unemployment figures that underscored the fragility of the UK labour market. Vacancies, for instance, fell below 700k September for the first time since early-2021, while public sector earnings growth continues to run at roughly double that of the private sector, a situation that remains unstable, and which quite obviously can’t be blamed on the ‘base effects’ that the ONS continue to site.

None of this is to say that the Bank of England won’t tighten policy in early-November. In fact, at this point, I’m not sure there’s anything which could dissuade the MPC from delivering a 25bp hike next month, or from following that with another such move at the February meeting.

Still, those hikes are clearly not without risk, given the fragile underlying state of the UK economy, lacklustre demand dynamics, and the still-low risks of second-round inflationary effects emerging. Ultimately, it would be folly to allow this morning’s jobs data to lull oneself into a false sense of security.

Disclaimer

It’s Just Another Manic Monday

Michael Brown — Mon, 19 Oct 2026 17:41:00 GMT

An odd stat, that I had to check three times as I didn’t quite believe it, that I came across today, is as follows. In 2026, Mondays account for 80% of the S&P 500’s year-to-date gain.

If you’re so minded to check my maths - the benchmark is up approx 12% YTD, with the compounded Monday return amounting to just under 9.2%, leaving the return excluding Mondays at 2.5%. A simple division, and you get the rather surprising stat above. As the chart shows, this is a fairly new phenomenon, and one which is much more prominent this year, than in those gone by.

What’s not unusual, though, is the ‘hit rate’, or the proportion of Mondays on which the S&P 500 has ended the day in the green. That’s hovering at around two-thirds of all Mondays this year, pretty much bang in line with the recent past.

This suggests, to me at least, that the slightly ridiculous contribution of Mondays to the overall performance of the equity benchmark this year has much more to do with the magnitude of the rallies that we’ve seen to start the week, than it does with the frequency of those gains.

In fact, the numbers back this up. On average, this year, the S&P has gained around 0.25% on the first day of the week, compared to the 5-year average of an 0.09% gain.

All this is very interesting, but what use is it?

Well, none of this is to say that we are guaranteed to gain ground every Monday, or that this phenomenon is guaranteed to continue forever more. However, when markets display quirks like this, they do deserve some pondering.

Having done that pondering, I’d wager that what we see here is similar, in some ways, to the well-known ‘Turnaround Tuesday’ effect - just on a different day!

Namely, that market participants have displayed a notable tendency to take risk off the table into the weekend throughout the year, hardly surprising given the fluid geopolitical backdrop, before adding that risk back again as the trading week gets underway, either without the escalation that those participants were hedging having taken place, or with a positive catalyst having emerged while markets were closed. Of course, this is just an educated guess, but it seems plausible enough to me.

Perhaps the biggest takeaway, though, is that all this data supports the adage that time in the market beats timing the market. As mentioned earlier, stripping out Mondays would’ve proved very costly indeed this year, in a useful example of how costly trying to time market moves can be. Equally, it’s a useful reminder that betting against the market’s ability to continue climbing a ‘wall of worry’ is seldom a wise idea.

Disclaimer

A Perfect UK Fiscal Storm Is Brewing

Michael Brown — Tue, 06 Oct 2026 09:25:00 GMT

The UK’s fiscal backdrop has not materially improved in recent months, yet the market’s perception of fiscal risk has diminished considerably, teeing up a potentially dangerous setup for the Budget on 28th October.

In terms of the backdrop itself, while the overall national debt level hasn’t yet quite breached the psychologically key £3tln mark, it continues to hover just below said level. Still, even if we’ve not yet printed a three-handle, borrowing metrics remain worrying, with the deficit running around 19% higher YoY as of end-August, and around £3.5bln above the OBR’s expectations.

This single-month data feeds into what remains a worrying broader backdrop. For the financial year to date (April - August), borrowing is running around £8bln above the OBR’s projected path, while the deficit is around £5bln larger than had been projected. Added to which, the approx £23bln fiscal headroom with which the fiscal rules were being met as of March has diminished significantly, as a result of higher Gilt yields, higher Bank Rate expectations, and various spending commitments, from capping bus fares, to needing to fund the Defence Investment Plan (DIP).

What is, perhaps, even more worrying than all this, is that borrowing has continued to increase substantially, despite tax receipts having also increased notably YoY. Put simply, spending growth is outpacing the growth in receipts - a clearly unsustainable situation.

All told, then, at the Budget, Chancellor Healey will likely need to find around £15bln in order to plug yet another fiscal ‘black hole’. While, in an ideal world, said hole would be plugged through spending cuts, Labour MPs have already shown their reluctance to passing said measures in Parliament. As a result, another tax-raising Budget is on the cards, though with changes to income tax, national insurance, VAT, and corporation tax all having been ruled out, it’s difficult to see how a ‘smorgasbord’ approach of several smaller tax tweaks can be stitched together to form a credible fiscal consolidation plan.

Perhaps more worryingly, there is increasing speculation that Chancellor Healey may seek a lower level of fiscal headroom than the £23bln achieved this time last year. While the headroom number should not become a fixed target, as that would rather defeat the point of the fiscal rules, cutting the buffer even tighter than it is at present risks taking the economy down a rather dangerous road. The last six months have shown how one significant shock can, for all intents and purposes, wipe out any cushion that the Treasury had left themselves. Leaving an even smaller buffer, in a world where negative supply shocks are becoming increasingly common, and where the geopolitical backdrop remains febrile, would be a significant, and to my mind unwise, gamble to take.

Amid all this, though, the market has slowly but surely priced a lower and lower UK fiscal risk premium. We can judge this premium easily through the 10-year Gilt-Treasury spread, which has narrowed drastically from around 45bp at the end of August, to around 9bp in early-October. In fact, this spread, which some have perhaps uncharitably termed a ‘moron premium’, now sits at its tightest since last June.

This means that conditions are ripe for a ‘perfect storm’ to form - the UK’s fiscal backdrop has continued to deteriorate, the Chancellor may further narrow the buffer against future shocks, a piecemeal approach to tax hikes is unlikely to raise the revenue that the OBR pencil in, and, most importantly, markets approach the Budget pricing the UK backdrop as no riskier than that of the US, or other G7 peers, which is clearly not the case.

Given this underpriced fiscal risk, short GBP positions remain attractive, particularly if cable is able to make a sustained break beneath the $1.32 handle, which would likely open the door to a test of $1.30 in fairly short order. Staying short the long-end of the Gilt curve also remains favourable, not only amid broader headwinds to Govvies from the energy/inflation backdrop, but also as this is where a return of fiscal fears is most likely to manifest.

Disclaimer

The BoE Are Set To Be Bullied Into An Unnecessary Hike

Michael Brown — Fri, 25 Sep 2026 11:40:00 GMT

There is little sign that the UK requires a tighter monetary policy stance. However, it looks like the ‘Old Lady’ may well be bullied into a rate hike anyway.

Clearly, headline inflation is too high. Headline CPI rose 3.1% YoY in August, and is likely to continue to rise over the remaining months of this year, and early in 2027, probably peaking around the 4% mark, if energy prices remain at, or close to, their present level.

That said, at risk of stating the obvious, the Bank of England, even with all their powers, can’t reopen the Strait of Hormuz, and can’t create barrels of oil, no matter where interest rates happen to be set.

This is why central banks focus on the underlying inflationary trends - i.e., those which their monetary policy levers can hope to control.

Here, the picture is much brighter. Core inflation held steady at 2.6% YoY in August, services inflation at 3.4% YoY, and excluding energy CPI rose just 2.4% YoY, also unchanged from a month prior. In sum, the underlying trend is not concerning.

Added to which, there remains little chance of second-round inflationary effects emerging in the UK economy. Yes, the possibility of those effects increases with every month that energy prices remain elevated, though that probability is starting from a very low level indeed.

The labour market, for instance, continues to demonstrate a remarkable margin of slack. Headline unemployment is just shy of 5%, private sector earnings are growing at a target-consistent 2.9% YoY, PAYE payrolls have fallen by around 20k for two months running, and vacancies are at their lowest level in over five years.

Furthermore, there are already signs that higher energy prices are stunting what had, up to now, been a resilient-ish demand backdrop. September’s ‘flash’ PMI survey pointed to overall output rising at its slowest pace in three months, while the latest BRC survey pointed to consumer confidence having deteriorated this month, snapping four straight months of improvement.

All this is to say that, were it not for elevated energy prices, we would in all likelihood be chewing the fat over the risks of inflation undershooting the 2% target, and debating by how much the Bank should be cutting rates. Instead, the Bank look set to be bullied into a hike, even though such a move would do nothing to resolve the energy crunch, while worsening an anaemic demand backdrop.

Put simply, with the FOMC, ECB, and BoJ having all raised rates in recent months, the BoE find themselves in the unenviable position of being the only one of the ‘big 4’ central banks not to have yet moved on policy. Even if there is little fundamental reason for the MPC to be thinking about a rate hike right now, the market clearly wants to see action, else a violent Gilt sell-off becomes increasingly likely.

Of course, one could hope for some degree of sanity in Whitehall to stave off nerves in the Gilt complex, but one could also hope for pigs to fly. Both being about as likely as the other!

So, a 25bp hike in November looks likely, with at least one more hike beyond that plausible, considering that central banks very rarely pull off ‘one and done’ moves. If such a monetary tightening does occur, though, it likely won’t be too long until the dreaded ‘R word’ starts cropping up once more, and we begin to wager when, and how quickly, the Bank must undo the tightening it has just delivered.

For markets, this means that present pricing, with SONIA implying a terminal rate just shy of 5%, looks far too hawkish. Added to which, downside risks to the GBP look to be mounting, not only as the BoE will likely tighten slower, and to a lesser degree, than peers, but also considering the dismal domestic backdrop, and ongoing fiscal woes, likely compoundint the quid’s misery further.

Disclaimer

Today’s Fed Hike Won’t Be The Last

Michael Brown — Wed, 16 Sep 2026 19:39:00 GMT

Sooo…in a line, a hike, and the shortest presser ever!

More seriously, I should probably start by admitting that I called this one BADLY wrong, the FOMC clearly have a much more bullish view of the US economy, and much less tolerance for looking through higher energy prices, than I’d expected

As such, it seems likely that the move today is the first in a series of hikes. The ‘dot plot’ indicated that the Committee probably see neutral around where the fed funds rate is right now, meaning that the logical assumption is that at least one more hike will be delivered in order to shift to an actually restrictive policy stance. Looking ahead, even though the ‘dot plot’ median pointed to no further hikes beyond this year, risks to that path clearly skew in a hawkish direction, given not only continued high energy prices, but also the resilient nature of the US economy

Clearly, this is an FOMC whereby the inflation side of the dual mandate is continuing to take precedence over the employment side. Not only is the standard to achieve the 2% target ‘clearly and at sufficient speed’, but Warsh also again made significant mention of the breadth of price increases at the post-meeting presser, suggesting that this is a metric investors should continue to pay close attention to. Again, Warsh reiterated that trends in data are of more importance than single data points, though clearly policymakers are not content with the present trend in price data

It was notable that Warsh did not believe the FOMC would need to engineer material labour market weakness in order to achieve price stability. This lack of a trade-off, if indeed it remains the case, should mean that the equity bull case continues to hold water even with this tighter policy backdrop, providing that there is no meaningful slowdown in consumer spending, or in AI Capex.

Perhaps an uncharitable characterisation of today’s move would be that while Warsh cannot be bullied by President Trump, he can be bullied by the bond market. Incidentally, Warsh wisely dodged questions regarding the President, but an inevitable Truth post can’t be far away. In any case, long-end yields are HIGHER post-FOMC, suggesting that perhaps the Fed weren’t the problem after all, and that a combination of crowding-out & higher growth expectations are what’s really driving yields higher.

Base case for now would be a 25bp hike in Dec, followed by a period on hold; though, as noted, risks to that skew hawkish, possibly towards another such hike in Q1 27, if meaningful inflation progress is not seen, and/or the geopolitical backdrop is yet to calm.

Disclaimer

Levels Look Scary, Rates Of Change Don’t

Michael Brown — Wed, 02 Sep 2026 10:29:00 GMT

In the current US macro environment, every man and his dog seems to be descending into some sort of hysteria about the levels of key economic variables. Yet, little attention is being paid to the direction of travel of those same indicators.

Take inflation, for instance. I’ve lost count of the number of times that I’ve been told how 65 months of above target inflation is an issue, and how that fact means Fed Chairman Warsh has no credibility. Quite why 60 months of above-target inflation under Chair Powell wasn’t an issue, there doesn’t seem to be an answer to - besides the obvious politically-motivated one.

There’s more here, in that the data doesn’t bear out what these critics are saying. Yes, having inflation run north of target for 5 years is not a good look for any central bank, and is not something I’ll sit here and defend.

However, it became common knowledge some years ago that, for all intents and purposes, 2% is now a floor not a ceiling. And, progress is being made towards that floor - core CPI, for instance, ran at 2.5% YoY in July, down from 3.1% YoY a year prior. While the core PCE metric has ticked higher, this owes almost entirely to quirks in the methodology, which will be resolved at the end of next month. The trimmed mean PCE metric, a more accurate gauge of underlying price pressures, has showed progress, falling from 2.7% YoY to 2.3% YoY in the space of twelve months. That latter point, clearly, being a rounding error away from the inflation aim.

As for the fiscal side of the ledger, again folk are getting caught up on levels, and losing sight of reality. Endless column inches have been taken up about US national debt exceeding $40tln - a completely arbitrary number - yet I don’t seem to remember ever having seen a similar story about nominal GDP exceeding such an arbitrary figure. Bad news sells, I guess!

The thing is, the news isn’t as bad as is being made out. Again, a 6% budget deficit is far from an ideal situation, but that situation has improved under Secretary Bessent compared to where it was under Secretary Yellen, who faced scant criticism. The overall deficit narrowed from 6.2% at end-24 to 5.7% at end-25, with the CBO forecasting a further narrowing this year. The primary deficit has also narrowed substantially, from 3.3% of GDP in 2024, to 2.1% in 2025. Again, numbers that need to be addressed, but also figures that are moving in the right direction.

So, what’s going on here?

Largely, it seems to be yet another case of market participants - who by now should know better - letting their emotions, and their political biases get the better of them. A myopic ‘Bessent bad, Yellen good’ or ‘Warsh bad, Powell good’ view serves nobody well, and does not reflect a reasoned or rational assessment of the facts in hand.

Given recent history on this front, I’d not bank on the hysteria in question dying down particularly soon. This does, however, provide potential opportunities, given that the ‘Fed must hike to preserve credibility’ and ‘US budget deficit spells doom’ narratives are quite obviously bunkum.

Ultimately, financial markets don’t trade on levels at which particular economic variables may sit, but do trade on the changes in those variables. So far as the budget, and the inflation, outlooks are concerned, things look considerably less worrying than current market pricing would imply. Fading hawkish Fed expectations, which continue to be dragged around by energy prices, and fading weakness at the long-end of the curve, where an activist Treasury approach can provide a helping hand, look reasonable to me.

Disclaimer

US Treasury’s Intent Is Clear, Yet The ‘Hot Takes’ Keep On Coming

Michael Brown — Mon, 24 Aug 2026 15:21:00 GMT

It may be a new week, but the ‘hot takes’ on efforts to tamp down long-end yields just won’t stop.

Of course, the issue in question remains that of the US Treasury’s plans to increase buybacks at the long-end of the curve. However, focus is now starting to fall on how those purchases may be funded, after a CNBC piece earlier today suggested that the Treasury General Account (TGA) could be used.

This is, at face value, interesting, considering that most participants - including myself - had assumed that increased long-end buybacks would be funded via increased issuance of short-term Treasury bills, and not cash, as has been alluded to today. Clearly, funding buybacks via cash would, all else equal, further reduce net issuance, and further reduce upward pressure on yields across the curve.

That said, there is a catch.

That catch is that, while the Treasury Secretary has discretion over how high a TGA balance they wish to maintain, shifting to a longer-lasting regime of a lower TGA cash balance would, again all else equal, result in an increased term premium. How would that increase in term premium be expressed? Through higher long-end yields, of course.

You’re probably ahead of me at this point, but in case you’re not, that would mean that this entire exercise becomes somewhat self defeating. Ergo, any decline in yields triggered by expanded buyback operations would largely net off against an increase in yields caused by a higher term premium.

That is, again, where I think many market participants are missing the point. All this hullabaloo over the buyback plans themselves, and now over the source of funds for said buybacks, is rather moot - unless you’re uber-obsessed with financial plumbing, in which case professional help is available for you. As mentioned last week, what matters here is the signal - Treasury are attentive to market developments, don’t like what they see, and will adopt an activist approach to engineer their preferred outcome.

In that vein, there are plenty of parallels that we can draw with recent efforts to prop up the value of the JPY, whereby the signal of the Treasury stepping in - via the NY Fed - is worth orders of magnitude more than the €5bln to €10bln that the Treasury actually spent in that operation. Added to which, if a weaker USD proves to be the ‘pressure release valve’ through which lower long-end yields materialise, the Admin are unlikely to be especially perturbed, considering a long-standing preference for a softer buck.

All this brings me back to the conclusion of Friday’s note, whereby market participants now have two choices. Either, one can moan and groan from the sidelines about this not being the way things ‘should’ be done; or, one can accept that this is now how things are, and get on with it, in the knowledge that ‘fighting the Treasury’ is utterly futile.

As such, the market implications are fairly self-explanatory over the medium-term - bullish gold (and other precious metals), bullish long-end Treasuries, and bearish USD.

Disclaimer

Bessent’s Buybacks - The Signal Is All That Matters

Michael Brown — Fri, 21 Aug 2026 06:01:00 GMT

Once again, plenty who should know better are letting themselves down when it comes to US macro developments.

I refer, of course, to Wednesday’s announcement from the US Treasury, that buybacks at the long-end of the curve will increase from at least $2bln per operation, to at least $4bln.

Yes, the numbers involved here are ‘small beer’. But that’s not the point.

Firstly, those two words - ‘at least’ - are pivotal. The offer/cover ratio of the last buyback operation was almost 10x, so buying back over and above the $4bln mark would be easy to do, and send an even stronger signal.

Secondly, signalling is the entire point here. What the Treasury, and Secretary Bessent, are doing is effectively firing a warning shot across the bow of market participants tempted to short the long-end of the curve. The unwritten message is ‘we’re watching, we don’t like what we see, and we’re prepared to act’.

Ultimately, this is just the latest piece in the puzzle of the activist Treasury seen during the Trump Admin. First, it was propping up the JPY. Now, it’s tamping down long-end yields. Whether you like it or not, and whether you think it’s ’anti free markets’ or not, doesn’t really matter. This is how Bessent & Co will operate, and another sell-side mental breakdown akin to that seen after the July FOMC meeting shan’t change his mind!

Of course, the Treasury can go further, and faster, here if need be. In all likelihood, they probably will. As mentioned, buybacks could be ramped up above the $4bln mark with ease, while the next QRA will probably see issuance increasingly tilt towards the front-end and belly. That wouldn’t be anything new, on a global level, with the DMO here in the UK having been ahead of the curve on that one for some time now.

All in all, this makes me harken back to the first note I wrote this year. In which I said that the ‘don’t fight the Fed’ mantra should be extended to not fighting the Treasury, or the President either.

Handily, all three of those have told us what they want. Chairman Warsh clearly wants to hold the fed funds rate steady, having not taken the ‘open goal’ on offer of hiking at the end of July. Secretary Bessent clearly wants lower long-end yields, as this week’s action has evidenced. And, last but not least, President Trump clearly wants higher equities, continuing to use the stock market as a yardstick for his Admin’s performance.

I remain reluctant to bet against any of them. Yes, the benchmark 10- and 30-year yields pared the post-buyback announcement fall in short order this week, but that’s not the point. A very strong signal has now been sent, the results of which we should judge over three or even six months. My money is on long-end Treasury yields being a fair chunk lower by then.

Disclaimer

You’re Supposed To Be A Strategist - Not A Stenographer - Time To Act Like One

Michael Brown — Tue, 04 Aug 2026 08:13:00 GMT

Almost a week on, and the collective sell side mental breakdown over Fed Chairman Warsh’s press conference last week continues. It appears that, after a decade or two of having every policy move spoon-fed to them, many are struggling with the fact that they might actually have to start doing their jobs properly again.

Yes, you will need to actually take a view on the economy. Yes, you will need to formulate an opinion on how the outlook may evolve. Yes, you will need to come up with a stance on the Fed’s reaction function. And, yes, you will have to map all of that onto how the policy path is likely to pan out.

Sounds like hard work? Well, you did sign up for it.

Frankly, the fact that so many are either unwilling, or unable, to grasp the fact that the Fed is no longer holding their hand is in equal parts hilarious, and farcical to watch. The wailing from the sidelines is also utterly pointless, considering that Chairman Warsh is hardly going to read a handful of research notes then suddenly change his ‘modus operandi’, having planned for and wanted the job he now has for at least 20-odd years.

The era of forward guidance is over, the age of explicit hints as to future rate moves is behind us, and the days where FOMC decisions would essentially be pre-announced are long gone. For market participants, ultimately, it’s now a case of ‘adapt or die’.

Either, continue to moan and groan about how the Fed are now doing things, and constantly harken back to the olden days. Or, get with the programme, tear up your preconceived ideas about how the institution ‘should’ operate, and instead invest time into reading the tea leaves as to how the Warsh Fed will work.

Because, for all the grumbling, we actually know quite a lot on that front already. For instance, dissent is clearly now welcomed, rather than discouraged as was the case in the consensus-building days of Powell and Yellen. Furthermore, Warsh’s focuses as Fed Chairman are explicit - moving away from data-point dependency, and instead focusing on the underlying trends in that data, throughout the entire forecast horizon. His goals are clear too, engineering more broad-based economic growth, and more limited inflation. Spend less time looking at headline CPI or PCE, and more time looking at the proportion of the basket where prices are rising at an above-target pace.

Most importantly, Warsh’s near-term tactic is to get the markets to do the work for him. Flagging the rise in Treasury yields between the June and July meetings explicitly at the press conference was a deliberate signal that the FOMC are fully aware of the tightening in financial conditions seen over the last six weeks. Said tightening is not a ‘bug’, but a ‘feature’. In fact, the whole plan for now is for Warsh to talk as tough as possible, thus avoiding the need to take the tough action of a rate hike, providing that the data behaves itself; which, right now, it is likely to do, as disinflation resumes through H2.

From a market perspective, all this will lead to higher UST and STIRs vol, as participants are forced to shift from flying on autopilot, to ‘flying blind’ so far as the policy path is concerned. Every FOMC confab will now be live, which will also increase hedging activity into those events. Further curve steepness is also likely, particularly with ~50bp of tights being discounted by swaps over the next 12 months, which seems unlikely to be delivered.

In equity land, it’s close to the best of both worlds. Already, the market is displaying robust earnings growth, in line with resilience in the underlying economy. Now, you’ve the additional tailwind of a likely dovish repricing in Fed policy expectations, coupled with a desire ‘from the top’ to broaden out that solid pace of expansion. The path of least resistance continues to lead higher.

All told, it’s time for folk to get with the programme. Whether one likes it or not, Warsh is running the show now, and will be for at least the next four years. Once more, plenty of participants appear to be letting their politics impact their PnL - you’d have hoped people would know better than that by now, given recent experience!

What's The Hedge?

Michael Brown — Mon, 08 Jun 2026 14:22:00 GMT

Don’t worry, this isn’t a piece about gardening, and I’ve not morphed into Alan Titchmarsh over the weekend.

Instead, Friday’s price action prompted an interesting question; namely, what’s the hedge in the present environment?

Friday = Sell Everything

As last week wrapped up, what we saw was essentially a ‘sell everything’ day. Stocks fell off a cliff, with the Nasdaq 100 notching its worst day in a year; Govvies slumped across the board, with the front-end bearing the brunt of the pressure across DM; and, precious metals lost their lustre, as gold slipped beneath its 200-day moving average for the first time in almost three years.

This begs the question as to how one is best able to hedge equity downside in the current environment.

That’s not an especially easy question to answer, when we consider not only what that environment looks like, but also how traditional risk-off hedges have traded since conflict broke out in the Middle East.

Traditional Hedges Aren’t Working

First, the macro backdrop. You don’t need me to tell you that, right now, said backdrop is clearly an inflationary one, at least in the near-term, as the Strait of Hormuz remains closed, for all intents and purposes, exerting continued upward pressure on commodity prices, even if the likelihood of those pressures broadening out, or of second-round inflationary effects emerging, still seems somewhat limited for now. Of course, all this, as well as any central bank tightening that is delivered, will ultimately culminate in a sizeable negative demand shock, though the market is unable, or unwilling, to price this for now, focusing instead on whether, and when, the conflict will come to an end as the first priority.

That, rather handily, helps explain why Govvies aren’t working as a hedge right now. In an environment where CPI, stateside, is heading north of 4% YoY, and where central banks across G10 are pulling the trigger on rate hikes, buying the front-end is a very difficult case to make. Even if one believes, as I do, that the market has gone too far in pricing rate hikes, fading that pricing is tough unless and until clarity is obtained either on where inflation will likely peak, and/or on central bank reaction functions, as the experience of early-March taught STIRs traders across the globe.

As for other hedges, the long-end of the curve is similarly unattractive for those operating over a shorter-term time horizon, given those inflationary risks, though the benchmark 30-year Treasury yielding 5.00%, or more, is undoutebdly attractive for those able to ride out the short-term turbulence that we’re currently seeing.

Precious metals, meanwhile, can’t realistically be considered a risk-off asset at this point, in my view. A cheap shot would be to say that retail have ruined both gold, and silver, but it’s an argument that holds water, given the speculative mania that took over both at the start of the year, and the near tick-for-tick perfect correlation that we now see on display between gold, and other high-beta assets such as equities, the AUD, and even crypto.

So, What Might Work?

So, if one wants to hide out from a proverbial market storm, what options do they have?

Frankly, the only real option right now is to hide out in cash, more often than not in the form of buying the greenback, and waiting for the storm to pass. This haven demand adds another aspect to the USD bull case, which was already a robust one considering the lesser degree to which the US economy is exposed to higher energy prices, as well as a resurgent ‘US exceptionalism’ narrative, fuelled on by last week’s PMIs, and of course Friday’s blockbuster May jobs report.

For those not wishing to hide out in the buck, the best option may well be to do nothing at all. Short-run choppiness is a feature, not a bug, of any and all bull markets, and despite the sizeable nature of Friday’s equity sell-off, this is clearly still such a market. In fact, the fundamental bull case is still a very robust one indeed, with both earnings growth and revisions solid, as well as economic momentum remaining robust. It is undeniable that the market has come a long way (30-odd%) from the March lows, and has moved in a straight line for the majority of that period. As such, a ‘pause for breath’, in the form of a modest pullback that we currently see, is no bad thing whatsoever, as such a pause will permit positioning to become much cleaner, likely leading to a more robust rally over the medium-run, unless and until those aforementioned fundamental factors underpinning the market begin to change.

Disclaimer

Japan Spent $75bln, To End Up Back Where They Started

Michael Brown — Thu, 04 Jun 2026 12:53:00 GMT

It’s perhaps easiest to sum up the Japanese Ministry of Finance’s ‘modus operandi’ via the medium of a GIF, at this point:

75 Yards To Go Nowhere

The month from 28 April saw the MoF spend around $75bln USD in an attempt to prop up the value of the JPY.

The result? USD/JPY presently trading at 159.70, precisely where spot was at the start of the aforementioned accounting period; and, in fact, the trade-weighted JPY actually being marginally weaker than when those interventions first commenced in the aftermath of the April BoJ meeting.

You Can’t Have Your Cake & Eat It

It’s fairly obvious to understand why these interventions haven’t achieved especially much, at least at face value. Japan is, at present, attempting to run a relatively loose fiscal stance, combined with a relatively loose monetary policy, all while attempting to prevent too significant a weakening in the currency. One could, reasonably, describe this approach to policymaking as akin to ‘having your cake and eating it’.

Quite simply, those three factors are typically mutually exclusive, with softness in the currency acting akin to a pressure release valve for the easy fiscal and monetary approaches.

All this is to say that, by and large, any interventions conducted by the MoF are likely to resemble more of a ‘speed bump’ in the broader trend of JPY weakness, as opposed to marking a durable turning point in the direction of travel for the yen. In fact, it’s tough to even argue that the MoF have succeeded in stamping out the FX speculation that they detest so significantly, given that both realised and implied JPY vols have been subdued for some time now. Realistically, the only speculators involved here at the moment are the interns manning the Tokyo hotline to the BoJ’s trading desk!

The MoF’s 2 Options

There are, ultimately, two options for the MoF here, over the medium-term. Either, the fiscal authorities can lean on the BoJ to tighten policy faster (unlikely), or adopt a tighter fiscal approach (even more unlikely!). Alternatively, the MoF can continue to throw good money after bad in an attempt to defend the 160 figure in USD/JPY, which while having been drawn as a ‘line in the sand’ for now, can’t be defended indefinitely abesnt a shift in the underlying fundamental backdrop.

All this, then, to me, means that the risk/reward continues to tilt in favour of short JPY positions for the time being, with ‘Mr Market’ likely, in time, to free itself of the macroeconomically-incompatible shackles that the MoF is attempting to impose on it.

Disclaimer

The ECB Should Go Big, Or Go Home

Michael Brown — Tue, 02 Jun 2026 14:26:00 GMT

I’ll preface this note by saying what I’ve said for some time now, that hiking rates into a negative demand shock is the very definition of a policy mistake, and hence is not a path that policmakers should go down.

However, considering that I am sat here typing this note, and not sitting on a policymaking committee of a G10 central bank, what I think they should do matters little from a trading perspective. Instead, what matters is what they will do.

A June ECB Hike Is On The Cards

Speaking of which, it seems all-but-guaranteed that the ECB will now deliver a 25bp depo rate hike at the conclusion of the June meeting. While the Governing Council’s hawks have pushed for such a move for some time now, and sources stories have long indicated that it is on the horizon, even the ECB’s more dovish members, such as Chief Economist Lane, appear to now be waving the white flag, having resigned themselves to a rate hike being delivered.

Keen historians, of course, will note that we have been here before. Twice, in fact! In 2008, under Trichet, the ECB found themselves raising rates in reaction to higher energy prices in the summer, before the GFC struck mere months later. Then, in 2011, history repeated itself, as policy was tightened right on the brink of the sovereign debt crisis. Somehow, I can’t imagine this being a case of ‘third time lucky’, and am instead reminded of how it is often said that the definition of insanity is to do the same thing over and over again, while expecting a different result.

An ‘Insurance Hike’ Would Be Counter-Productive

Monetary history lesson aside, what troubles me most about the ECB’s seemingly inevitable upcoming rate hike is a prevailing wisdom that such a move could be ‘one and done’, framed as more of an ‘insurance’ measure than anything else.

The problem with this, though, is that by hiking once, the deposit rate would remain within the range of estimates of its neutral level, at 2.25%. Consequently, while policymakers may frame such a move as being aimed at ensuring inflation expectations remain well-anchored, and bearing down on potential risks of second-round inflationary effects, it seems unlikely that either would be achieved.

Instead, in delivering such a modest tightening, the ECB would likely find themselves in something resembling the worst of all worlds - tighter policy would act as a further headwind to already-anaemic growth momentum, but policy would likely not be tight enough to bear down on perceived upside inflation risks. A compromise solution to try and please the Governing Council’s hawks and doves alike, would instead likely end up pleasing nobody at all.

Lagarde Should ‘Go Big’ Or ‘Go Home’

As such, for President Lagarde and her colleagues, it seems very much as if this is a scenario where they must either ‘go big’, following the likes of the RBA and embarking on a tightening cycle; or, they must ‘go home’, following the BoE and the FOMC in adopting a ‘wait and see’ approach, with rate hikes on the backburner for the time being.

From a market perspective, the ECB continuing to follow this ‘middle of the road’ approach is one that likely poses chunky downside risks to the EUR. Not initially, perhaps, given that there would likely be knee-jerk upside in the common currency if/when a hike does come to pass at the June meeting, though more likely over the medium-term as participants are forced to price something resembling a more ‘stagflationary’ eurozone economic outlook.

Disclaimer

The Equity Bull Case Is Robust, And About More Than Just Geopolitics

Michael Brown — Mon, 01 Jun 2026 12:51:00 GMT

Five months through what feels like a strong contender for the longest year ever, and we also have a very strong contender for most hated bull market ever as well.

The rebound from the lows seen in late-March has been nothing short of meteoric on Wall Street, with the S&P having rallied around 20%, and the Nasdaq 100 having gained over 30%, in a little under two months.

Still, it’s not just on Wall St where the bulls are having all the fun - that face-ripping rally has been even more violent in Asia, most notably so far as the KOSPI is concerned, while even European equities have joined in with the party, as most bourses now trade above their late-February closing levels, before conflict in the Middle East began.

Geopolitical Optimism = Turnaround Trigger

Of course, hopes for a resolution in that conflict are a large part of the reason for markets having rebounded so strongly, but they are by no means the only factor, as we will discuss momentarily.

That said, geopolitical optimism was clearly the initial trigger for the market to begin to turn around, and for dip buyers to enter the fray en masse as the first quarter came to an end. While it is right to argue that the scale of the economic damage that the conflict is likely to prompt, both in terms of the inflationary impulse, and negative growth risks, is not yet known, it is also the case that for equities to endure a sustained sell-off there must typically be two factors. Not only must there be an unrelenting flow of negative headlines, but those headlines must become greater in magnitude over time in order to elicit a market reaction, and overcome the natural positive drift that equities tend to display. As of now, with a fragile ceasefire still in place, and with US-Iran negotiations ongoing, news flow simply isn’t becoming incrementally more bearish, thus isn’t deterring dip buyers.

Added to which, one must consider the intended audience of the news. If indeed a deal is to be done to end the conflict, as we must all hope proves to be the case, then it is unsurprising for each side to seek the ‘upper hand’ in negotiations, by obtaining as much negotiating leverage as possible, largely through hawkish public comments. On top of this, any deal that is agreed will need to be ‘sold’ at home as a win, not a surrender, again meaning that punchy rhetoric is employed in order to persuade a domestic audience. Participants would remain well-served by focusing on the overall direction of travel - which remains away from kinetic re-escalation, and towards an agreement being reached - and focusing less on relentless headline noise, which provides little signal on the whole.

Earnings Growth Impresses

In any case, the equity rally is not solely a geopolitical story.

Certainly, stateside, rip-roaring earnings growth is a major factor behind the equity upside, and arguably a much more important longer-run driver of a sustained bull run than anything that may be happening in the Middle East.

With Q1 reporting season now largely done & dusted, the S&P 500 is set to report earnings growth in excess of 28% YoY, the best such rate since the tail end of 2021. Undeniably, the Tech sector has been a huge factor in underpinning such a pace of earnings growth, though only the Healthcare sector has recorded a YoY earnings decline, while seven of the S&P’s eleven sectors have recorded a double-digit annual increase. Furthermore, of those index members to have reported for the quarter, 85% have surprised to the upside of consensus EPS expectations, while the average magnitude of that upside surprise is double the 5- and 10-year means.

AI Enthusiasm Returns

Coinciding with an impressive earnings season, there has also been a marked resurgence in enthusiasm around the broader AI theme.

By and large, said enthusiasm has shone through in the hardware space, where there remains a tremendous supply-demand mismatch, not only as has been well-documented so far as memory is concerned, but also when it comes to the cutting-edge chips needed to power the latest generation of AI models. However, what’s also been notable is the rebound seen in software names, where the whole ‘SaaSpocalypse’ appears to have come to an end, with more rational heads beginning to prevail in that, no, Fortune 500 companies will not be vibe-coding their own CRMs and putting firms like Salesforce out of business. Not yet, anyway.

Conclusion

Putting all this together essentially leaves us with three key pillars underpinning the case for further equity upside - geopolitical optimism, robust earnings, and AI enthusiasm. Of course, risks to this bull case are present, most notably if we were to see earnings growth falter, or more persistent inflation requiring a Fed policy response, though neither would represent the base case for now. Instead, it seems to me that the ‘path of least resistance’ continues to lead higher, with any dips likely to represent buying opportunities. Interestingly, on that note, only 5 of the S&P’s 11 sectors have yet reclaimed their pre-conflict level, suggesting that there is likely ample scope for a broadening of the rally to provide an impetus for a further leg higher.

Disclaimer

Coming soon

Michael Brown — Sat, 30 May 2026 13:01:38 GMT

More coming soon.

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