The Frontier

Scott Bessent announced 6 billion dollars in long-end bond buybacks, exceeding his initial 4 billion dollar guidance. Despite this intervention, the long end sold off and yields rose as the bond market demanded more aggressive action.

A historical regression of the 10-year Treasury yield against nominal GDP indicates a fair value of roughly 5.8% for the 10-year yield. This projection assumes nominal GDP continues growing at a 6.6% clip.

Currency interventions starting when the Japanese Yen was in the 160s successfully pushed the currency down to 153. Quinn Thompson attributes this relative stability to a more hawkish stance from the Bank of Japan.

August headline PPI rose 0.4% month-over-month, driven by energy pass-through and rising wholesale diesel costs. Core PPI rose 0.2%, slightly below the 0.3% consensus, while portfolio services fell 1.6%, offering a benign input for the PCE metric.

Quinn Thompson notes that central banks historically reverse rate hikes within 12 months when hiking into an energy supply shock. Raising front-end rates restricts domestic energy production by increasing capital costs rather than resolving physical commodity supply shortages.

Market expectations for the upcoming Federal Reserve meeting shifted to a 70% probability of a rate hike. Quinn Thompson criticizes Federal Reserve Governor Christopher Waller's reaction function as too dogmatic and overly reliant on single inflation data prints.

Jack Farley's analysis of long-end bonds suggests that when term premia drives yields higher, a credibility-establishing rate hike typically causes long-end yields to fall. Conversely, when rising inflation expectations drive yields, long-end yields continue rising even after a hike.

Political opposition to data center construction is rising across both major US political parties. Quinn Thompson notes that several midterm political candidates have flipped their positions from pro-data center to anti-data center due to changing public polling.

Quinn Thompson compares the current leverage unwind in the semiconductor trade to the post-2021 crypto market crash. Highly levered trades that capture public attention typically require six to twelve months of range-bound price action to heal.