The Bond Market Is Pricing In Something Worse Than Inflation | Weekly Roundup

Jack Farley (0:00)

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All right, everybody, welcome back to another roundup edition of Forward Guidance. Back to one of the classic episodes after a busy few weeks. We've had some recent guest episodes. Join us, which has been a ton of fun.

Then I was out across the world for a week for our DAS Asia in Singapore, which was a great time. We're back. There's a ton to talk about in the market, so it's good to just have a little bit of a catch up episode here. Quinn, what's going on, man?

Quinn (0:38)

Yeah, not much. It's funny, in Miami, the weather starts to get really solid. The humidity cracks come this time after September, and it's raining every day still in September, and I felt it was such a good post-summer recharge of batteries, and it coincided with the amount of activity, I think, in the markets, and I wrote the other last week as like, I think things are going to start to be more active from here on out in the rest of year, and yeah, this week was no shortage of things to do.

Jack Farley (1:15)

Yeah, it feels like volatility is finally starting to come off and get exciting again. So for sure, lots to talk about.

Before we do, quick little shill hit here. But we have our second conference in two months, which is kind of insane to think about for our events team is how cracked they are. But we're doing the DAS London, November 10th and 11th. We're both going to be there. It's going to be a ton of fun.

Yeah, last week was awesome. London in the fall, it's just beautiful. So it's going to be great. We have some great guests, some great speakers coming up, and probably a bunch of really great side events too. Come have a pint at one of the many pubs that I'm sure are going to be hosting events. It's going to be a great time. Stoked to have you there as well, Quinn, it's going to be great.

Quinn (1:57)

Yeah, I won't skip.

Unlike Singapore, unfortunately, I was just too far, but I am locked and loaded for London. I'm super excited.

Jack Farley (2:06)

Awesome. Yeah, should be a good panel of talks for sure. Yeah, we'll have the agenda up in the next couple of weeks here. We'll talk about that. But yeah, November 10th, 11th, get your ticket. See you there. Okay, Quinn, where the hell do we even start here?

We had a lot of inflation data this week, which I think is pretty key knowing that we have this Fed meeting coming up on the 28th.

CPI came in hot, which is certainly interesting. Headline hot, also Cora, which is obviously a lot of the marginal driver here has been energy prices. To see that Cora also came in hot above expectations, obviously not a great sign for inflation expectations. However, regardless of this, and even more so today, we got some PPI data that was also really hot, and both days we saw bond yields rally quite significantly. For a moment there, it looked like it was increasingly likely that the Fed is gonna be pricing at a hike for October, but then it's come off the back a little bit. So yeah, first thing I'm trying to figure out personally is how do I read this day? Obviously, inflation data is one of the most lagged ones of the business cycle, but it's quite fascinating to see the price action compared to this economic data release. I'm curious how you're thinking about it, Quinn.

Quinn (3:25)

Yeah, I think what's made this week so interesting and fun has been the number of cross-currents at play. And everything from event risk with the inflation data to idiosyncratic thematic events with the AI trade, and then positioning on top of it. So coming in, you've had weeks of record bond shorts all across the market. And why not if that trade has worked for going on two plus straight months of easy money for shorting bonds.

Jack Farley (4:06)

Yeah, here's a good one of that positioning. It was stretched.

Quinn (4:10)

That's a great chart. So what you could see in the chart is that the long end stopped going up first. And then so the curve flattened, started to flatten pretty substantially. And then the front end kind of joined in the reprieve.

That set the stage, the positioning. So the trade started to kind of counter trend and the positioning stayed very long. And then we had burner inflation data, which the market was very clearly off sides for, which was strange to me with oil pressing, you know, into the upper bounds of its range.