Macro

Start with the shape of the curve, because it is doing something specific. The 30-year Treasury closed Friday at 5.27% and the 10-year at 4.75%, both fresh multi-decade highs, while the 2-year FELL to 4.28%. Long yields rising faster than short ones is called bear-steepening, and it is not what a market pricing a hotter economy looks like, because a hotter economy would lift the front end first. It is what a market pricing a long-dated risk it cannot hedge cheaply looks like. Two such risks now sit on top of each other: a Federal Reserve committee that Chair Kevin Warsh has freed to vote its own views, and, since Friday evening, reporting that the President has ordered a bombing campaign against Iran's energy infrastructure that could begin this weekend. The 2s10s curve at +0.47% has steepened 12 basis points in two sessions. Now the part most commentary gets backwards: policy is not tight. The effective fed funds rate is 3.63% against headline inflation of 3.73%, so the real policy rate, meaning the interest rate after subtracting inflation and therefore the actual price of money, is MINUS 0.1%. Money is roughly free at the front end. And the 2-year at 4.23% trades 60 basis points ABOVE the funds rate, which is the bond market's mechanical way of saying the next move is a hike rather than a cut. That single spread is why the hike case survives soft inflation prints. On inflation itself, level and momentum still disagree and the hawks are voting the level: headline CPI runs 3.73% year over year, but the three-month annualized pace is 2.78% and sticky-price CPI, the slow-moving basket that reflects wages rather than commodities, is 2.81%. Expectations are calm at 2.28% ten-year breakevens. The 10-year REAL yield, the nominal yield minus expected inflation, sits at 2.41%, near a two-decade high. Extreme real yields against ordinary expected inflation is what deliberate tightening looks like, not a credibility failure. The labour market refuses to cooperate with any recession story: jobless claims fell to a 202,750 four-week average from 207,500, the three-month payroll average runs 111,000 a month, unemployment is 4.2%, and the Sahm rule indicator, which flags recessions when unemployment rises half a point off its cycle low, reads 0.07 against a 0.50 trigger. That is precisely what keeps the hike case alive, and a negative payroll print is the single number that kills it. On the household side the divergence narrowed rather than widened this run, which is worth stating plainly because it cuts against this desk's own view: University of Michigan sentiment jumped to 49.5 from 44.8, a second consecutive improvement off a record low, and credit-card delinquencies at 2.92% keep improving, so two of the three consecutive repair months required are now on the board. Against that, the savings rate at 2.7% is a cycle low and spending growth on flat real income is buffer drawdown by definition, and gasoline at $4.10 is directly exposed to whatever happens in the Gulf. Those offset, which is why the household view (thesis 8) holds at 70% rather than moving. Housing tightens through the same channel: the 30-year mortgage at 6.66% is a one-year high, and because mortgages price off the 10-year plus a spread, currently a wide 1.98%, a long end breaking out on governance and war risk pushes the mortgage away from the 5.5% entry gate structurally rather than cyclically. The gate is now 116 basis points away. Real house prices are falling about 2.6% a year, since Case-Shiller rises 1.11% against 3.73% inflation, so waiting costs a levered buyer nothing (thesis 9). Credit still refuses to confirm any of this: high-yield spreads, the extra yield junk-rated borrowers pay over Treasuries and the earliest broad warning on this board, sit at 2.84% near record tights, investment grade at 0.80%, the Chicago Fed's financial conditions index at -0.55 where negative means loose, and the VIX closed at 15.99 after a week that felt considerably worse. The one liquidity tell that did deteriorate is net liquidity, the Fed's balance sheet less the Treasury's cash account and reverse repos, which fell to $5.82 trillion from $5.92 trillion in two days. That is Warsh's stated balance-sheet withdrawal showing up in the plumbing.

• 30-year Treasury 5.27%, 10-year 4.75%, 2-year 4.28%, 2s10s +0.47%: bear-steepening, the shape of a long-dated risk premium rather than a growth repricing.
• Real policy rate -0.1% (funds 3.63% against CPI 3.73%), with the 2-year trading 60bp above funds: the front end is not restrictive, and the market says the next move is up.
• Brent $90.15 and WTI $87.18 against a strategic reserve of 308 million barrels, the lowest since March 1983 after eighteen straight weekly draws; commercial crude at a 2018 low, 7% under seasonal.
• 30-year mortgage 6.66% against the 5.5% entry gate: 116 basis points away and receding. Real house prices falling ~2.6% a year, so waiting is free.
• High-yield spreads 2.84% near record tights, VIX 15.99, net liquidity $5.82 trillion after a $100 billion two-day drain.
• Bitcoin's $62,791 weekly-close repair line: spot $62,528 is now 0.4% BELOW it, a flip from 0.3% above earlier today, and the deciding close prints Sunday evening.
• The oil damage sits in the back of the futures curve, not in spot: the barrels a strike would remove are largely barrels already not reaching the market, and the difference between the two scenarios is repair time, roughly three months for a reopened strait against twelve to eighteen months for destroyed infrastructure. Front-month prices are also the easiest part of the curve for a reserve release or a wave of short-selling to suppress, so WTI at $87.18 may confirm late or not at all.
• What to watch next: whether a strike lands before Asian markets open Sunday evening New York time, then bitcoin's Sunday weekly close against $62,791, then Friday's July payrolls (consensus 91,000 against 57,000 prior, unemployment expected 4.3% from 4.2%), which is the named disconfirmer for the entire Fed hike case.