Iran Put on Notice, Partners Warned; How to Corral the Yield Curve
Trump vows economic pain for Iran; my colleague has an intriguing (and smart) economic plan; bracing for the week ahead.
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Whoa…
“President Trump has dismantled Iran’s military capabilities, destroyed nearly 100 percent of its military factories, and buried its nuclear program.
We are now entering the endgame. At dawn begins an economic D-Day — the single greatest financial offensive ever marshaled against an adversary.
The Islamic Republic has subsisted by dressing extortion as security guarantees. It has drawn strength from a calculus that regards Iranian retaliation as certain and American enforcement as negotiable. Under President Trump, that era is over. And those who fear the danger of defying Tehran ought not to discount the cost of testing Washington.
The President has created the conditions to leverage every agency, every authority and action many assumed we would never summon. Our objective is to sever every economic lifeline that sustains the tyrannical regime until Tehran stands alone.”
– Treasury Sec. Scott Bessent, on Twitter (or X) Sunday (last) night
The Gist of It
On Sunday, the Sec. of the Treasury Scott Bessent penned a piece at the Financial Times. In his op-ed, Bessent warns Iran’s trading partners that they had probably better back off. He wrote, “Any remaining tie to Tehran will hasten the economic ostracism of countries and entities, whether that tie be purposefully constructed or willfully ignored. And if, as the regime’s grasp on power crumbles alongside its economy, Iran resorts to military action against US forces or its Gulf neighbors, make no mistake: President Trump will respond swiftly and decisively.”
In closing, the Secretary made clear where he was going with this: “The world should understand that our objective is to sever every economic lifeline that sustains the tyrannical regime until Tehran stands alone. Pascal considered salvation to be a choice. As a great wave of American resolve comes ashore, are Iran’s enablers willing to wager their future against it?” Bessent will hold a press conference this afternoon at 2 p.m. ET to reveal new information concerning this effort and to answer questions for the media. Crude oil futures are trading lower through the zero-dark hours on Monday morning in anticipation. How does this play with China? We shall soon find out.
Peter Tchir’s Take…
Anyone else read our TheStreet Pro colleague Peter Tchir over the weekend? In his weekly Sunday night piece for Academy Securities, as he did in real time last week, discussed the Treasury Department’s attempt last week to pressure the long end of the slope of the Treasury yield curve. The U.S. Treasury Department has upped the size of its bond repurchase operations from $2 billion to “at least” $4 billion. An attempt at yield curve control? Maybe a half-hearted attempt. Why is that? It’s still a drop in the proverbial bucket when measured against the $7.5 trillion in T-Bills and $21.7 trillion in coupon debt currently outstanding.
Peter, who for those that do not know, is probably the single smartest individual I ever met (and incredibly became friends with) in my four decades on Wall Street. That’s right. In a business where nearly everyone is pretty bright, Peter was the brightest. Some of you may recall that Peter was the fixed income or “bond” guy at the old Jim Cramer “teach-in” roundtables that we used to do for TheStreet. Yours truly was the “equities” guy. Some of you may even recall that Douglas Borthwick was the “currencies” guy and Dave “Not Tiger” Williams was the “precious metals” guy. Ahh, those were fun times.
Well, back to the story at hand. Peter, in his latest work, imagines the Fed joining the effort to corral the yield curve in order to help control borrowing costs as the federal debt load reaches scary new highs. Peter mentions that our central bank is “bleeding money” with $426 billion in bonds maturing within a year with an average coupon of 2.9%. Peter suggests that the Fed could sell those bonds at a small loss, monetize the premiums paid and purchase the same notional amount of long-dated Treasury bonds.
This would be a sort of “operation twist,” but would also be balance sheet neutral. In other words, other than that monetization of those premiums, no new money supply would be created. Peter also sees a carry trade opportunity here for the Fed vs. what is now a costly carry experience. The current effective Fed Funds rate of 3.63% presents an everyday reminder of just how much an average coupon of 2.9% can hurt.
The U.S. Thirty-Year Bond currently pays 5.25%. The Twenty-Year Bond yields 5.23% and the Ten-Year Note yields 4.71%. I don’t know how far down the slope of the curve the Fed might be willing to slide in order to pressure the long end, but it really doesn’t take a genius to the genius behind this idea. It just took one to say it (or write it) out loud. Fed Chair Kevin Warsh speaks from Jackson Hole, Wyoming this Friday.
The Week That Was…
Last week was not a very smooth week for U.S. financial markets. Front-month crude oil prices moved higher, Treasury yields nudged higher (prices lower) as well, despite the announcement by the Treasury Department that it would expand (at least double) the maximum size of its liquidity-support buyback program targeting longer-dates nominal coupon debt securities.
No this is not a form of quantitative easing. There is no cash creation out of thin air being announced here. For the geniuses in the back griping out loud and suggesting so, while this is indeed intervention, I bring forth exhibit A (rising gold prices) and exhibit B (sagging U.S. dollar valuations) as evidence to the contrary.
Still, after a positive knee-jerk reaction to that news and an overall decent day on Friday, equities, broadly… had a rather gnarly week. That might have been helped along by a tough week for the retailers who as always go to the tape late in earnings season. While Target (TGT) had a good week, Walmart (WMT), TJX (TJX) and Ross Stores (ROST) all got their tails kicked. The S&P: 500 and Nasdaq Composite both saw their respective three-week winning streaks come to a close last week. This is how last week went at the index level:
– The S&P 500 gained 0.43% on Friday but lost 1.43% for the week.
– The Nasdaq Composite also gained 0.43% on Friday but lost 2.05% for the week.
– The Nasdaq 100 tacked on 0.33% on Friday but gave up 2.45% for the week.
– The Russell 2000 gained 0.85% on Friday but surrendered 1.65% on the week.
– The S&P Small Cap 600 moved 0.66% ahead on Friday but gave up 2.13% for the week.
– The S&P Midcap 400 added 0.51% on Friday but lost 2.46% for the week.
– The Dow Transports gained 0.88% on Friday but gave back 1.02% for the week.
– The Philly Semis gave up 0.51% on Friday and a nasty 5.45% for the week.
– The KBW Bank Index added a nice 0.98% on Friday but gave back 4.1% for the week.
On Friday, eight of the 11 S&P sector SPDR ETFs closed out the session in the green and one closed unchanged. Materials (XLB) easily led for the day followed by health care (XLV) and the discretionaries (XLY). The utilities (XLU) took a beating on Friday.
For the week, eight of the 11 S&P sector SPDR ETFs finished the five-day period in the red. Technology (XLK), the utilities and the industrials (XLI) were all slapped around last week. Health care was the big winner.
Week Ahead
After a week lacking in volatility dispute the release of a number of high profile macroeconomic data-points, we head into the week ahead…
– The Geopolitical: Where do we want to go with this? The war in Iran that really is not a war anymore. Or the trade war with Canada of all nations? How about Argentinian beef. Lower beef prices would be nice. At the expense of states that seem to vote red though. No, I do not have answers.
– Macro: This will be an active week for numbers nerds such as myself. Wednesday will be the biggest day of the week for economists. That day, July personal consumption expenditure report, July personal income & spending, and July durable goods orders will all cross the tape. Oh, and the first revision to the second-quarter gross domestic product will make headlines as well. On Thursday, we’ll get a look at Wholesale Inventories for the month of July. This Friday, the Bureau of Labor Statistics will revise its estimate for non-farm payroll job creation for the twelve-month period ended this past March.
– The Federal Reserve: It only happens once a year. It’s sort of like Christmas in late August for economists. The Kansas City Fed will host its annual economic symposium at Jackson Hole, Wyoming this Wednesday into the weekend. The highlight of this song and dance show will be Fed Chair Kevin Warsh’s address this Friday morning.
– Earnings: We have a fairly active week ahead for earnings releases, driven mostly by retailers but also by big tech. Dick’s Sporting Goods (DKS) will lead things off this Tuesday morning, followed by fellow retailers Abercrombie & Fitch (ANF), Kohl’s (KSS), Williams-Sonoma (WSM), Best Buy (BBY). Dollar General (DG) and Dollar Tree (DLTR) as the week progresses. On the tech side, CrowdStrike (CRWD), Nvidia (NVDA) and Salesforce (CRM) all report on Wednesday afternoon, followed up by Marvell Technology (MRVL) on Thursday.
Fed Funds Futures
Fed Funds futures trading in Chicago are currently pricing in a 60% probability for no change to be made to the current target range (3.5% to 3.75) for the Fed Funds Rate at the culmination of the next FOMC policy meeting on September 16th. That’s down from a 67% likelihood a week ago at this time. There is now a 74% likelihood priced in for a 25-basis point rate hike on December 9th. That’s up from a 68% probability a week ago.
There are no rate cuts fully priced in at any point in the future looking out towards year’s end 2027, though there is now a minority probability being priced in as early as October of 2027. There is now no second 25-basis point rate hike priced in at any point in the future.
Economics (All Times Eastern)
No significant domestic macroeconomic data-points scheduled for release.
The Treasury Department (All Times Eastern)
2:00 p.m. – Speaker: Treasury Secretary Scott Bessent.
Today’s Earnings Highlights (Consensus EPS Expectations)
No significant quarterly earnings scheduled.
At the time of publication, Guilfoyle was long CRWD, NVDA equity.
