Kevin Warsh was sworn in to run the Fed today. The bond market immediately repriced the entire rate path.
By October, traders see a higher probability of a rate INCREASE than a cut. By January, it’s almost a certainty.
That’s a stunning reversal. Warsh was brought in specifically to lower rates.
The marketplace sees it the exact opposite way.
Here is what the data is screaming in tonight’s weekend update:
- The 10-year yield nearly cracked 4.7% this week. It was trading 4.2% just a few weeks ago. A break above 4.8% changes the three-year chart entirely.
- CME Fed Watch shows October’s rate hike probability above 50%, December near 70%, and January as a near certainty. This is not a cut cycle anymore. The bond market is pricing sustained inflation.
- Oil is sitting at $96 a barrel into a holiday weekend. If the peace deal were real, oil would not be here. I took a bullish position in USO before Memorial Day for exactly this reason.
The S&P 500 doesn’t agree with any of it.
Equities are priced for peace while bonds are priced for sustained inflation. One of them is wrong.
Here is how I’m positioning around that disconnect. Warsh wants to contract the Fed’s balance sheet and control policy through rates alone. That is bullish for the dollar in the near term.
I took a short position in EEM today. The structure is 91 days out, nearly 2,000 contracts on a $5 wide spread. Emerging markets are the cleanest way to play a strong dollar without getting tangled up in the gold trade.
There is one more setup worth your time. SPX skew is at the bottom of its recent range. Puts are cheap relative to actual market risk.
Expected move next week is $109 in a four-day trading week. With low skew and an all-time high in the index, this is the moment to ante up for summer volatility.
