Central Bankers vs. The Bond Market | Roger Hirst

Episode Summary

Executive Summary: Roger Hurst argued that markets are pricing a faster Fed pivot than the economic data justify. He sees a likely recession still ahead, but more likely in H2 2023 or even 2024, after a window of improved financial conditions, easing inflation, and resilient labor data. He also emphasized China’s shift from commodity-led growth to sustainability and a more political, fiscal macro regime.

Main Topics: Fed, ECB, and BoE policy shifts after the February rate meetings (Priority: 5/5): Hurst said the central banks mostly delivered expected hikes, but their tone was less hawkish than markets wanted. He argued Powell missed a chance to tighten financial conditions more aggressively and that the market interpreted the messaging as a quasi-dovish pivot. Market pricing of rate cuts versus the Fed’s dot plot (Priority: 5/5): A major theme was the disconnect between implied rates markets and the Fed’s guidance. Hurst said the market is pricing cuts by mid-2023, but he sees that as an overly optimistic pivot assumption that may reflect either recession fears or misplaced faith in an early Fed response. Recession timing, rolling slowdown, and labor-market uncertainty (Priority: 5/5): Hurst still expects recession, but not necessarily immediately. He stressed the unusual resilience of unemployment, the ambiguity of COVID distortions, and the possibility of a rolling recession rather than a single synchronized collapse. Labor market strength versus true wage power (Priority: 4/5): He argued the labor market looks tight but not genuinely strong: participation remains below pre-COVID levels, job openings are elevated, but real wages and wage inflation are not yet spiraling. That may buy the Fed time and delay a classic recession signal. China reopening, commodity demand, and regional reflation (Priority: 4/5): Hurst said China is no longer the same pure commodity-demand engine it was in the 2000s. He expects a more domestic, sustainability-focused credit impulse, which may support some reflation but not a broad commodity supercycle. Long-term shift toward fiscal policy, labor, and regionalization (Priority: 4/5): He framed the macro backdrop as a slow transition away from central-bank-led monetary dominance toward fiscal policy, labor influence, and more regionalized globalization. This, in his view, is structurally more inflationary and politically driven. Trading implications: options, silver, bonds, dollar, and cash (Priority: 3/5): Hurst suggested that lower volatility makes index calls more attractive than puts, silver could benefit from reflation and technical breakout potential, the dollar may still have upside, and cash yields now provide flexibility while waiting for better entry points.

Key Arguments: The Fed, ECB, and BoE did what was expected, but not enough to convince markets that inflation is fully contained. Forward rates and the funding curve are implying cuts too early; Hurst thinks the market is too optimistic about the Fed’s reaction function. A recession still looks likely, but the timing has shifted from early-2023 certainty to a more delayed H2 2023 or even 2024 scenario. Unemployment is the key variable the Fed watches; low PMI/ISM alone will not force cuts unless labor weakens materially. The labor market is tight because of COVID-era participation distortions and hoarding of labor, but it is not yet delivering strong real wage growth. If inflation falls while wages remain stable, households gain positive real income, potentially extending the expansion and delaying the recession. China is moving away from debt-fueled infrastructure and property-led commodity demand toward domestic consumption and sustainability. The macro regime is shifting from capital/monetary dominance to fiscal/labor dominance, which could keep inflation structurally higher over time. A recession would likely be rolling and uneven rather than a single 2008-style systemic event. Private equity, private debt, and asset managers may now carry more latent risk than banks, because banks have been forced to reduce balance-sheet risk. The best opportunities may come after the recession starts, not before; keeping cash and dry powder is rational in an uncertain regime.

Data Points: Fed funds peak pricing: ~5.0% to 5.25% - Implied by the market and discussed as the likely terminal rate area before plateauing. Market pricing of cuts by mid-2023: About 50 bps of cuts by end-2023 - Hurst described the funding market as pricing an early pivot, with rate cuts starting around June/July 2023. Cuts priced over 18 months: Around 200 bps - He cited the SOFR/fed funds curve as implying roughly 200 basis points of cuts over the next 18 months. SOFR/funding curve level: Around 96.75 - Converted to an implied policy rate near 3.25% or lower depending on the curve discussed. Fed funds curve level: Around 95 - Converted to an implied policy rate near 5.0% using the 100 minus price convention. UK floating-rate mortgage share: Roughly one-third - Used to illustrate how UK consumers feel rate hikes faster than many U.S. borrowers. UK two-year fixed mortgages: Roughly one-third - Described as already or soon feeling the impact of higher rates as they roll off. UK five-year fixed mortgages: Roughly one-third - Presented as the slowest channel through which rate hikes affect households. U.S. participation rate gap: About 1 percentage point below pre-COVID - Hurst cited this as evidence that labor supply remains distorted by pandemic effects. Job openings: Still above 10 million - Mentioned as a labor-market slack indicator that Powell had focused on previously. ISM threshold: 47 - Hurst noted 47 is usually recessionary only when unemployment is also rising. Consumer sentiment: Lowest since 1954 - Used as a classic recession warning signal from last year. NFIB small business optimism: Lowest ever - Cited as another recessionary extreme that had not yet been matched by unemployment deterioration. FTSE upside volatility: 11 vol - Used to illustrate relatively cheap options pricing for equity upside exposure. S&P upside volatility: Around 15 vol - Hurst said this was near fair value for the index’s realized movement. VIX level: Below 20 - Evidence that market volatility had fallen, making options structures more attractive. Silver technical level: 25 - He identified 25 as the top of a two-year downtrend channel and a possible breakout trigger. Silver downside level: 17 - He said this was the lower end of the channel, highlighting poor risk-reward for outright longs. Dollar retracement level: 62% retracement from highs - He suggested the dollar still had room to recover even after its pullback. Bank of England hike cited: 50 bps - Used in discussing how rate increases hit UK floating mortgages quickly. Peak U.S. inflation example: 9.1% - Referenced as the inflation high that would be considered transitory if it falls back over time. Oil example: WTI at $150 in mid-2000s - Used to show that high commodity prices do not always translate into proportionally high CPI.

Pivotal Quotes: "The pivot is unlikely, unless we get a very rapid deterioration in unemployment." — Roger Hurst: His base case for rates is that the Fed keeps hiking to around 5%/5.25% and then plateaus rather than cutting quickly. "This is not the 1970s. This is not institutionalised, embedded, unionised labour that can go out there and punch their employers." — Roger Hurst: He argued current labor-market power is weaker than the classic wage-price spiral era. "We are transitioning from a price shock to a growth shock." — Roger Hurst: He summarized the macro cycle as moving from inflation-driven pain toward a later-stage slowdown/recession.

Implications: Listeners should expect higher volatility and a slower, more uneven macro adjustment than a simple recession call. Hurst favors patience, cash, and selective hedging, with opportunities likely emerging after growth weakens and markets reprice recession more fully.