Ease Concession
August 24, 2025 – Weekly comment
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Starting with a couple of excerpts from Powell’s Jackson Hole speech:
With inflation above target, our policy rate is restrictive—modestly so, in my view.
Putting the pieces together, what are the implications for monetary policy? In the near term, risks to inflation are tilted to the upside, and risks to employment to the downside—a challenging situation. When our goals are in tension like this, our framework calls for us to balance both sides of our dual mandate. Our policy rate is now 100 basis points closer to neutral than it was a year ago, and the stability of the unemployment rate and other labor market measures allows us to proceed carefully as we consider changes to our policy stance. Nonetheless, with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.
I wrote this last week:
There is plenty of cover for Powell to ease 25 at the next FOMC. Funds are above neutral. Any uptick inflation can be explained away as a ‘one-time’ tariff response. Labor conditions are softening. All Powell has to say is that the Fed is taking a small step towards bringing policy closer to neutral as an insurance policy against weakening labor conditions at a time of AI angst. …If the next employment report is awful, then a 50bp cut could occur.
A 50 bp cut in September is now a very high bar, but 25 is a lock. Let’s consider a few market signals from 1) Jackson Hole 2024, 2) Sept 18, 2024 initial 50 bp cut, and 3) Jackson Hole 2025. In 2024 Powell was explicit:
The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data…
On Friday the wording was hedged:
… the shifting balance of risks may warrant adjusting our policy stance.
Here are just a couple of market prices (SFR6 is the rolling first red, currently SFRU’26):
SPX 10Y SFR6 FED MID
Friday, August 23, 2024 Jackson Hole
5634 3.80 9678 5.375
Sept 18, 2024 (FOMC)
5615 3.705 9708 4.875
Friday, Aug 22, 2025 Jackson Hole
6467 4.255 9689 4.375
So, in the one year between Jackson Hole speeches, SPX is up about 15%. The ten-year yield is up 45 bps. The first red SOFR is +11 bps (down in yield). FF are down 100 bps. Note that the high in the red SOFR pack coincided with the Sept 2024 rate cut. The red pack high in Sept’24 was 9717 or 2.83%. That was still 200 bps lower than the new FF target of 4.875%, a HUGE spread! If the Fed cuts 25 next month, target will be 4.125%. I think it would make sense for the one-year forwards to be about 100 bps lower, perhaps a bit under 9700, which is exactly where the red pack is NOW (on Friday red pack = 9696 or 1.04%). In the past several months, the Fed Effective rate of 4.33% has been a magnet for the 10y yield. I would forecast 10s to gravitate to 4.0-4.12% after the September ease, with a slight downside bias. 10/30 spread ended Friday at a new high of 62. I would expect a move towards 70 as the 10y yield falls a bit more than 30s. (30y Friday was 4.884%).
After the September 2024 cut, rates exploded HIGHER. But as alluded to above, pricing going into that meeting was stretched. The new target midpoint was 4.875%. The 2y was 3.55% or 132 bps lower. Tens were 3.60% or 127 bps lower. In September the new midpoint in FF will be 4.125%. Tens on Friday were 4.26% or 14 bps higher. 2y at 3.69% is 43 lower. There’s a lot of sideline hand-wringing that an ease will pour gasoline on the inflation embers. With equity indices running hot, that’s certainly a concern. However, it’s the forward and longer-term rates that should have more of an influence on stocks. The AI spending boom is showing signs of slowing. And there are data points like this one from Redfin:
Roughly 58,000 U.S. home-purchase agreements were canceled in July, equal to 15.3% of homes that went under contract last month. That’s up from 14.5% a year earlier and marks the highest July rate in records dating back to 2017.
On the week, FFV5 settled -0.5 bp from 9589.5 on 8/15 to 9589.0 on Friday. 3 bps away from a 25 bp ease. FFF6 settled 9624. 9642 represents cumulative 75 bps of ease by the end of the year. On 8/15 FFF6 settled 9622.5. Two-year yield was 3.757, now 3.692, a decline of 6.5 bps on the week.
Below is a chart of the SOFR red pack. To me, the formation suggests an upside breakout, though I believe it will be modest (capped below 9750) absent a large catalyst. Also, I would mention for those who think the Fed simply can’t ease with inflation this much above target, in 2007-early 2008 CPI was right around here and moving higher. Inflation takes a back seat when labor fundamentals are quickly deteriorating. The other thing I would note is that the 2% inflation target is going to lose its mythical status. For Powell, the 2% target was a mantra. In the new regime we’ll be moving to 2.25 to 2.75%. When you can’t hit an explicit target, change it. The US needs higher inflation and nominal growth to change the debt trajectory.
As a nod to the ‘run-hot’ theme, Lawrence McDonald @Convertbond posted this on X. I am long GDX and URNM but was actually a bit surprised at these ytd gains (and MAG7 lag):
2025 Jr Gold Miners GDXJ +78%
Silver Miners SIL +74%
Rare Earth Metals REMX +50%
Nuclear NUKZ +43%
Silver SLV +34%
Copper Miners COPX +25%
Steel SLX +21%
Mag7 MAGZ +10%
*As we have moved closer to central bank-driven financial repression, markets are speaking.
Below is an interesting link on rare earths.
“All the critical minerals the US needs annually for energy, defense and technology applications are already being mined at existing US facilities. ..These minerals …are currently being discarded as tailings of other mineral streams like gold and zinc…
https://phys.org/news/2025-08-critical-minerals-theyre-thrown-analysis.html
This week brings 2, 5, 7 year auctions T, W, Th. Conference Board Consumer Confidence on Tuesday. That data set includes this point: Labor Differential Index (Jobs easy or hard to get). Last was 11.3, which is the low of this cycle but reasonably high on a historical basis. Absolute high was in 2022 at 47.1.
PCE prices Friday expected 2.6% yoy from 2.6 last. Core 2.9% from 2.8
OTHER THOUGHTS/ TRADES
So what do we do? Buy stocks up here? After the initial ease in 2024 reds got a little below 3%, thus the discount for forward earnings was lower. Now, we’re around 3%. That’s NOT a new tailwind, maybe there will be a little bit on forward rates as yield curve control is instituted. Is that going to engender confidence? I don’t think so. Is hotter nominal growth going to bail us out? I don’t think so. Immigration policies have detracted from growth. The AI spending boom is likely to come to a screeching halt in terms of acceleration.
New high 2/30 119 bps. Low of year in Feb was 40. New high 5/30 to 112.5. Feb low 34.5.
Big trades:
+60k TYV 113c covered 111-26, 23 paid (wed). Settled 26 vs 112-05+
+60k TYV 113.5c cov’d 112-04 to 03, 18 paid (fri).Settled 17 vs 112-05+
Market tends to gravitate towards peak open interest. Sept expiry TYU 112.5c were peak. TYU5 settled Friday at 112-04+.
+60k SFRH6 9725c 6.0 to 6.5 (wed). Settled 6.25 vs 9649.0.
+100k SFRV5 9650c 3.25 (mon). Settled 3.75 vs 9623.0
| 8/15/2025 | 8/22/2025 | chg | ||
| UST 2Y | 375.7 | 369.2 | -6.5 | wi 365.9 |
| UST 5Y | 384.3 | 375.9 | -8.4 | wi 375.9 |
| UST 10Y | 432.4 | 425.8 | -6.6 | |
| UST 30Y | 492.4 | 488.4 | -4.0 | |
| GERM 2Y | 197.0 | 194.5 | -2.5 | |
| GERM 10Y | 278.7 | 272.0 | -6.7 | |
| JPN 20Y | 256.1 | 266.4 | 10.3 | |
| CHINA 10Y | 174.3 | 178.4 | 4.1 | |
| SOFR U5/U6 | -90.5 | -100.0 | -9.5 | |
| SOFR U6/U7 | -2.5 | -3.5 | -1.0 | |
| SOFR U7/U8 | 24.5 | 25.0 | 0.5 | |
| EUR | 117.05 | 117.18 | 0.13 | |
| CRUDE (CLV5) | 61.98 | 63.66 | 1.68 | |
| SPX | 6449.80 | 6466.91 | 17.11 | 0.3% |
| VIX | 15.09 | 14.22 | -0.87 | |
| MOVE | 76.66 | 78.10 | 1.44 | |
