It's a Regime-Shift for US Real Yields: 3-Minutes MLIV

[00:00:00]Good morning to you. Things pretty quiet today out there, I suppose, with the US out. Um, which means we take stock of where we've come in the week. And it's been a really big week in terms of central bank policy. We've heard from the fed, a new chairman at the fed in the shape of Kevin Warsh, and some new hawkish news for markets to digest. Do you think that that's still having an effect I see European bond yields are a little higher this morning as oil prices take higher. Are we still dealing with that fed hawkish narrative. I think so I think people are really registering that you know it wasn't just the FOMC that was hawkish Kevin Warsh himself was was hawkish in terms of his focus on inflation was very key.

[00:00:42]I think one of the big takeaways was the restoration of fed credibility, which has been undermined since Donald Trump, uh, came to power for a second term, or at least perceived to be under threat. Uh, and Kevin Warsh kind of gave a message that he cares about inflation. And therefore, you know, the fed wasn't going to be slack in its inflation fighting mandate.

[00:01:02]And that is a whole message for a regime change in US real yields.

[00:01:07]For the past 18 months, we've priced that the uh, fed policy will be easier than orthodox monetary policy or orthodox, um, monetary theory would suggest. Uh, and instead he's kind of gone.

[00:01:20]No, we do care about inflation. And that means we're gonna have to shift back into a higher US real yields regime.

[00:01:25]And that has consequences for further action.

[00:01:27]It's very bullish. The dollar.

[00:01:28]It's bad for speculative assets that depend on, uh, weak dollar and lower real yields. Precious metals are a perfect example.

[00:01:36]So I think that those kind of dynamics of more to play out, I think the dollar can strengthen, uh, you know, has more to play at this kind of strength.

[00:01:43]It'll take a little bit of time to get fed through.

[00:01:45]It won't be a violent move. It'll be a slow readjustment.

[00:01:48]And I think we have more downside in precious metals like gold and silver.

[00:01:52]Yeah. You wonder how long it will take for that credibility to become a benefit in these markets.

[00:01:57]Mark, what do you think it is that is driving the sour sentiment as we head into the weekend? Is it is it is it just is it just because we've got the thin volumes? So I do think, you know, we do have low volumes, not just the US holidays. Holidays, uh, at a bunch of places in Asia as well. So it's been low liquidity.

[00:02:14]I think that hawkish ness is an issue that kind of ongoing hawkish us, that move in yields that move higher in the dollar.

[00:02:21]That's that is a tightening of financial conditions for the rest of the world.

[00:02:24]On top of that, of course, we've had a little bit of negative sentiment that that the talks, the next stage of talks between the US and Iran aren't going to proceed immediately. Uh, and also with the the IDF still hitting in Lebanon. There's, there's I think a little bit of concern about the deal, especially given the amount of criticism the deal has got from, uh, you know, previous Trump allies.

[00:02:48]Um, I think there's a little bit more worry about the how sustainable the deal is going into the weekend. People are just taking a little bit of profit after a great run. Okay, so it sounds as if, I mean, we've got U.S. futures, but they're not going to be not going to be cash trading today. U.S.

[00:03:02]features are pointing weaker, uh, you know, suggesting that things could be difficult for Monday, but there's a long way to go.

[00:03:08]A lot of football, perhaps, for everybody to watch over the weekend.

[00:03:11]Mark, what are we missing that we're not talking about in markets that we should be giving more attention to? Just briefly.

[00:03:18]Uh, I think before the weekend it is UK focus.

[00:03:20]But to me, the big move today is we're going to we're going to care about UK assets. How are they going to cope with the Brennan victory. And of course then precious metals we need to watch. I think there's much more downside there.