Climbing The Macro Mountain | Top Things to Watch this Week

Posted: Oct. 30, 2022, 7:01 p.m.

"Every age has its own collective neurosis, and every age needs its own psychotherapy to cope with it." - Viktor Frankl, Man's Search For Meaning

Chart Booklet & Podcast

Access all of this week's charts used in today's writing and Macro Corner Episode 22: Chart Booklet

Check out last week's podcast episode on the Dollar, Bond Yields, and Credit Risk: Macro Corner Podcast, Episode 21

Email [email protected] with any questions as it pertains to today's article or any Macro Corner podcast episode -- we are more than happy to discuss! 

Perspective From The Macro Mountain

Sometimes, we have to take a step back from the screens and remove ourselves from the noise that is the daily news flow. Today's day and age is largely not about access, but rather about variant perception. But how do you perceive things different from everyone else? How do you get to have an opinion before incrementally more market participants start to agree with your viewpoint? In my mind, it is about the perspective one gets from breaking it down to the most fundamental truths with the the ultimate fundamental being price. Depending on the gap between your perception and current price, an opportunity exists or doesn't exist. 

In today's article, I will take a slightly different approach and draw from our new research report series Weekly Tactical Insights. We currently cover Crude Oil, Natural Gas, Copper, Treasuries, and a special Commitment of Traders summary. Each report is meant to be as data-rich as possible. The rawness of data can afford an opportunity to reach a conclusion that differs from consensus.

Data & Commentary

U.S. treasury yields across the curve have remained sticky as inflation data continues to come in hot. While recession talk is front & center, yields are yet to reflect deflationary dynamics that stem from a recessionary shock. Higher yields occur at a time when nominal spending is still very elevated, especially in services. The longer inflation sticks around, which then leads to upward pressure on wages, the longer the Fed will maintain tight financial conditions. As Nick Timiraos from the WSJ shared in a series of Tweets: "The big question heading into the Fed meeting is about what, if anything, Powell will say about December...the bigger challenge is this: 'How do you slow down demand for labor?'"

Slowing down labor happens via a slowdown in spending, which implies that wealth needs to get destroyed before the Fed has a chance to pause or pivot. Right now, we are in the midst of markets trying to anticipate that very pause.

We need to balance the idea of wealth destruction with the notion that terminal rates may be higher for longer as a result of structural underpinnings (underinvestment in energy, housing shortage, labor availability.) We wrote a piece titled The Structural Underpinnings of the U.S. Economy Compared to FOMC Projections back in August. 

Slide 1-1

Unlike nominal treasury yields steering clear of the recession trade, yield curves are flashing red. Not only does the 2s10s curve continue to be inverted, but we also witness a 3m10yr curve that is right around inversion.

The Fed will welcome pain for the economy as pain is required to bring down inflation. The assumption is that financial stability is assured.

Slide 2-1

Frustratingly for the Fed, breakeven rates are not corroborating.

Again, this is about future inflation expectations and how entrenched a higher nominal yield curve becomes. The Fed is likely to accept higher nominal yields if that is indeed the state of the economy. If that nominal number is too high to achieve price stability, though, below trend growth may be required. 

Slide 3-1

Despite 400+bps in rate hikes along with Quantitative Tightening, nominal as well as real economic growth remains strong. As the economy shifts to services, it is unlikely the current binge in the experience economy will continue to the same extent, which would again be desirable to slow wage inflation.

Slide 4-2

As spending shifts around at unusually high levels - one sector of the economy at a time,- inflation has stayed resiliently high. The Fed needs to destroy enough wealth to reduce spending.

Slide 5-1

While credit spreads in isolation have been extremely well behaved, nominal yields are putting a burden on highly levered firms. The reality is that some business models simply don't work with higher cost of capital.

Slide 6-2

Without circulation of credit, the wheels of the economy stop spinning. We have not seen that despite an increase in the nominal cost to borrow. Devoid of credit spreads worsening substantially, we may see a slow but steady deleveraging cycle.

Slide 7-1

The Fed has made it very clear that it wants financial conditions to stay tight in order to break the inflation cycle. Whether they have the tools to do so is a question yet to be answered. Regardless, we do know that it was a loosening in financial conditions that had triggered Powell's hawkish Jackson Hole speech. Now that they are loosening again as the stock market rallies and credit spreads remain well behaved, markets will watch the Fed's reaction.

Slide 8-1

In order to declare victory, the Fed needs to be aggressive enough to reduce demand without destroying long-term growth potential. However, the latter is of lesser concern as central banks globally are dealing with a single mandate assuming financial stability is in place. Until the job is done - a clear path to 2% average inflation, - Fed hostility will remain the primary risk to the economy, earnings, and the financial system writ large. 

At some point, we will get to a place where we either need to accept higher nominal rates as a result of structural forces, or return to conditions that resemble the pre-Covid economy. While the latter is less likely, we will listen to market signals and continuously update our views based on the ultimate fundamental and variant perception thereof: price.

Until next time, good luck & good trading.

Be sure to check out prior writing of Top Things to Watch this Week:


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Economic Calendar



Data Release Times (C.T.)



China ECO-1

Data Release Times (C.T.)



Eurozone ECO-1

Data Release Times (C.T.)

More Of The Upcoming Economic Data Points Can Be Found Here.


Food for Thought

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Slide 10



Marathon Petroleum (MPC) reporting before the open on Tuesday:

  • Consensus: EPS est. $6.80; Revenue est. $35.67bn

Commentary on the following be monitored:

  • Refining capacity
  • Crack spread outlook
  • Investment spending outlook
  • Crude product demand



Advanced Micro Devices (AMD) reporting after the close on Tuesday:

  • Consensus: EPS est. $0.55; Revenue est. $5.58bn

Commentary on the following be monitored:

  • The semiconductor inventory cycle
    • Will the absolute inventory level be higher than before?
  • Capital spending cycle



Cheniere Energy (LNG) reporting before the open on Thursday:

  • Consensus: EPS est. $5.45; Revenue est. $7.83bn

Commentary on the following be monitored:

  • Long term LNG contracts 
  • Freeport LNG export facility updates
  • Export capacity and U.S. production


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