RenMac Off-Script: Hawk and Awe

PodcastRenMac Off-ScriptJeff deGraafSep 25

The discussion centers on rising rates, a more hawkish Fed outlook, and the potential effects on demand, inflation, and risk appetite. Speakers also assess U.S.-China negotiations, Senate polling, and the consequences of possible Democratic control of Congress. Market signals are mixed, with long-end yields at post-financial-crisis highs, weakness in lower-rated credit, and a sharp split in relative strength.

Interest Rates Monetary Policy Inflation

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Key Takeaways

The speaker views the two-month U.S.-China truce as a possible bridge to a longer extension, with a potential Trump-Xi meeting at APEC in November and an announcement at the G20 in December. The speaker says substantive negotiations are happening at the working-group level, with Bessent driving the talks, while questioning whether China’s representatives will have authority to act.

Democratic leads of 2% to 3% in Senate races may fall within the cited 3% to 4% polling margin of error; if a Democratic-favoring polling bias corrects by Election Day, Republicans could retain the majority. Separately, one speaker argues that Democratic control of either chamber would effectively end Trump’s legislative agenda, with Senate control also hindering confirmations and regulatory efforts.

The speakers attribute rising longer-term rates to restrictive monetary policy amid resilient growth and elevated oil prices, and describe Fed opinion as turning more hawkish; markets were broadly pricing another October hike, while one speaker expects at least three hikes. They also say firm inflation—including consensus expectations for a 0.3% core PCE increase, which one speaker estimates would annualize near 3%—could keep pressure on the Fed to hike, even as cooling demand further weighs on housing and durable goods.

Economic signals are mixed: retail sales and core durables were strong even as related equity-market areas weakened, and September’s S&P Global PMI was stronger than many regional surveys. The speaker says markets are looking for about 100,000 payrolls, which, given a low breakeven rate, would probably be enough over time to keep unemployment falling and eventually put upward pressure on wages; consumer spending could still slow.

GEO-POLITICS

Powell Precedent — The speaker cites Powell’s 2018 rate hikes as a precedent for a delay before Trump publicly criticized him: Powell hiked in March, and Trump began criticizing him in July. That delay, the speaker says, does not rule out a later confrontation with Warsh.

“Powell, mean, people forget, right? But, know, too late, Jerome too late. He hiked in March 2018…”—

China Truce — The speaker sees the two-month U.S.-China truce extension as a possible bridge to a longer deal. Trump and Xi could meet at APEC in November, with a longer extension potentially announced at the G20 in December. The speaker presents this as an optimistic possibility, not a confirmed outcome.

“Look, I think the takeaway is the truce extension…”—

China Dialogue — The speaker says Trump indicated he did not expect to change anything before meeting with Xi, and asks whether China would send representatives empowered to act. The substantive negotiations, the speaker says, are happening at the working-group level, with Bessent driving the talks.

“Is China going to send people empowered to do things?…”—

TECHNOLOGY

Data Center Incentives — The speakers say community support for data centers can shift when residents receive benefits such as rebates or school funding. They describe the prevailing approach as conditional approvals, not moratoriums. Those incentives could raise hyperscalers’ costs and delay projects.

“You sort of ask people broadly, do you support data centers? Right now the response seems to be no…”—

ECONOMY

Restrictive Policy — The speakers attribute rising longer-term interest rates primarily to restrictive monetary policy, alongside resilient growth and elevated oil prices. Yields have risen even as equities moved sideways and in places with fewer fiscal concerns. They argue the Fed cannot allow supply shocks to keep passing through.

“So, you know real yields are a sign that monetary policy is getting tighter so I would say that tighter monetary policy over the you know medium term horizon is…”—

Hawkish Fed — The speakers describe Fed opinion as shifting in a more hawkish direction. One expects at least three hikes, broadly reversing the prior year’s insurance cuts; markets were broadly pricing another hike in October. The speakers also expect further pass-through and slower consumer spending, which they say could weigh on risk appetite.

“No. I mean, I think at the margin, you've seen some of the former doves kind of adopt more of a hawkish posture, notably New York Fed President Williams…”—

Demand Restraint — The speaker argues that the Fed will need to cool elevated nominal demand, even if that further depresses housing and consumer durable spending.

“I mean, the Fed has to look at what's going on with nominal demand, and to the extent that nominal demand is elevated relative to their objectives, they're going to…”—

MARKETS

Long-End Yields — A speaker says long-end Treasury yields had broken out to their highest level since before the financial crisis.

“Well, speaking of things that didn't exist since, you know, the early two thousands, we had the long end breakout, treasury yields at their highest level since before the financial…”—

Utility Capitulation — A speaker says capitulation signals in utilities usually lead to a bounce, but their historical relationship with yields is mixed. A similar signal coincided with a yield turn or peak in 2023, but not in 2018. The speaker cautions against treating the signal as evidence that yields have peaked.

“But I think it's interesting is that we did get a capitulation signal in utilities…”—

CCC Credit — The speaker reports that CCC credits rose 40 basis points over the last month, while single-B and double-B credits fell 18 and 5 basis points, respectively. Over three months, CCCs rose 130 basis points while B credits fell 13 basis points. The deterioration is consistent with private-credit concerns, the speaker says, but it is unclear whether a few issuers or systemic issues are driving it.

“And if you look at the data or the numbers, just over the last month, right, we've seen a 40 basis point increase in CCC credits…”—

FORECASTS

Rates And Stocks — The speaker says rates will keep rising until the stock market breaks. The view reflects Warsh’s focus on financial conditions and his characterization of them as accommodative.

“So that's why I said, I mean, the markets will continue to press…”—

Treasury Yield Breakout

The long end has reached its highest yields since before the financial crisis; analysts cite restrictive monetary policy, real rates, and signs of strain in the weakest credit tiers.

Real Rates And Credit

Neil attributes rising long-term yields mainly to tighter monetary policy, while Jeff highlights widening CCC spreads and the risk that credit deterioration could spread to stronger borrowers.

Hawkish Fed Path

Neil sees the Fed's balance of opinion shifting hawkishly, with further rate hikes intended to cool demand even if rate-sensitive housing and consumer spending weaken.

Warsh And Inflation Risk

Neil worries that limited forward guidance and seasonally firm first-quarter inflation could push Warsh toward further tightening, keeping pressure on markets and financial conditions.

AI Data Center Politics

The speakers expect political resistance to data centers to produce conditional approvals and higher community-engagement costs, rather than broad moratoriums that would halt construction.

Momentum And Relative Strength

Jeff sees a sharp split in relative performance, with few new highs and many more lows; capital-intensive sectors are weakening as higher rates weigh on them.

Senate Control Scenarios

The panel discusses Democratic chances of taking the Senate, the consequences for Trump's legislative agenda and nominations, and possible shifts in Republican leadership.

Congress And Data Centers

The speakers review Senate priorities, permitting reform, and a House proposal shifting data-center power costs to companies, alongside trade talks with Mexico and Canada.

Jobs Inflation And Fed

Neil expects employment and inflation data to show resilient growth and firm prices, reinforcing the case for more Fed hikes; he also argues Warsh's remarks move markets.

Market Cycle Outlook

Jeff previews the market-cycle update and Micron results, noting that the current inflation-growth zone has historically been weak for equities and that future data will determine whether conditions shift.