The Fed Has Killed Rate Cut Hopes. Can Stock Markets Hold Up? Why Ilya Spivak is Still Short

Key Concepts

• Macroeconomic Divergence: The disconnect between equity market optimism and the tightening of global monetary policy.
• Relative Strength Index (RSI): A momentum oscillator measuring the speed and change of price movements.
• Break-even Inflation Rates: The difference between nominal and real (TIPS) yields, used to gauge market-implied inflation expectations.
• Structural Labor Shortage: A demographic-driven labor market imbalance caused by the retirement of the Baby Boomer generation and shifts in immigration policy.
• OPEC Fragmentation: The geopolitical implications of the UAE leaving OPEC, signaling regional discord and potential supply-side volatility.
• Hawkish Bias: A monetary policy stance favoring higher interest rates to combat inflation.

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1. Market Overview and Equity Performance

The S&P 500 has reached new highs, effectively erasing the sell-off triggered by the US-Iran conflict. However, the presenter notes a significant loss of momentum in the equity markets.

• Technical Divergence: While the S&P 500 is hitting higher highs, the RSI indicator is failing to confirm this trend, suggesting a weakening of underlying bullish conviction.
• Volume Analysis: Trading volume has been consistently low during the recent rally, with Monday’s volume hitting the lowest levels since Easter, indicating a lack of institutional conviction.
• Tech Earnings: Big tech earnings (Google, Meta) have not significantly moved benchmark indices, suggesting the market is in a "wait-and-see" mode pending further reports like Apple’s.

2. Geopolitics and Energy Markets

Crude oil (WTI) has surged toward $107/barrel, driven by regional instability rather than supply-demand fundamentals.

• UAE/OPEC Split: The UAE’s departure from OPEC after decades of membership highlights deep fissures within Gulf Arab unity.
• Market Interpretation: Despite the UAE’s desire to increase production (which would typically lower prices), the market is pricing in regional fragmentation and the risk of the conflict broadening, which overrides the potential for increased supply.

3. Federal Reserve Policy and Economic Outlook

The Fed’s recent policy statement maintained steady rates, but the internal debate is shifting toward a more hawkish stance.

• Policy Dissents: Four policymakers dissented; one (Governor Steven Mirren) favored a rate cut, while three others pushed for a more balanced, less "easing-biased" language.
• Structural Inflation: Fed Chair Jerome Powell highlighted that inflation is being driven by resilient consumer spending and structural shifts (demographics and immigration) that interest rate adjustments cannot easily fix.
• Inflation Data: Core readings (excluding energy/food) show services and goods inflation trending upward, contradicting the earlier "disinflation" narrative.
• Future Expectations: Market pricing now suggests an 84% probability of no rate cuts this year, with a growing possibility (13.4%) of a rate hike.

4. Global Central Bank Trends

The "hawkish" shift is not limited to the US.

• ECB and Bank of England: Both central banks are seeing market pricing shift from "standstill" to expectations of multiple rate hikes by October, as the global "cheap money" era faces a rapid choke-off.

5. Trading Strategy and Positioning

The presenter maintains a bearish outlook on risk assets, arguing that stocks are currently "offsides" compared to the bond and commodity markets.

• Current Positions:
  • Short: Gold, risk assets (Russell 2000, NASDAQ, S&P 500 via put verticals).
  • Long: US Dollar, Bitcoin.
  • Bonds: Expecting yields to continue marching higher (bond prices lower).

6. Notable Quotes

• "The markets have implicitly signaled we’re done with the war. We’re done worrying about the Fed. We’re just going to keep going." — Millius Peback, on the S&P 500's recent behavior.
• "The job market feels uncomfortable for new entrants because they essentially need for space to be made and there’s not that space." — On the demographic-driven labor market stagnation.

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Synthesis/Conclusion

The market is currently characterized by a dangerous disconnect: equities are trading at record highs on thin volume and fading momentum, while the bond and commodity markets are aggressively pricing in a "higher-for-longer" interest rate environment and geopolitical instability. With the Fed moving away from an easing bias and global central banks signaling potential hikes, the "cheap money" support system is evaporating. The presenter concludes that equities are likely to face a correction as they eventually reconcile with the hawkish reality already reflected in other asset classes.