How Macro Trading Veterans Are Thinking About 2025 | David Cervantes & DCP

Episode Summary

Executive Summary: The episode is a macro trading roundtable on Fed policy, rates, and positioning after a hawkish FOMC meeting. Donnie (a veteran pit trader) and David (a macro strategist) agree the market was too aggressively priced for cuts, but differ in style: Donnie leans on price action, momentum, and regime shifts; David frames trades around the Fed’s dual mandate, projections, and 3-6 month growth/inflation paths. Both remain constructive on bonds if labor softens and see the economy as mid-cycle, not late-cycle.

Main Topics: Fed meeting and hawkish repricing (Priority: 5/5): The discussion centers on the day-after reaction to the FOMC: a 25 bps cut was expected, but Powell’s tone, updated projections, and dissents made the market reprice fewer future cuts and push yields/curves higher. Different trading styles: price action vs macro framework (Priority: 5/5): Donnie emphasizes intuition, momentum, support/resistance, and staying nimble; David emphasizes understanding the Fed’s intentions, growth/inflation trajectory, and using the market’s pricing versus policy intent. Mid-cycle vs late-cycle debate (Priority: 4/5): Both speakers argue the U.S. economy looks more mid-cycle than late-cycle, citing strong labor markets, productivity, and credit conditions, though Donnie notes many market participants still fear late-cycle deterioration. Inflation, labor market, and bond implications (Priority: 5/5): They discuss how sticky inflation and a still-solid but thinning labor market shape bond pricing, with both seeing potential for more cuts later if labor weakens and inflation cools further. Market plumbing, SOFR/OIS, and rate-market structure (Priority: 4/5): Donnie explains how modern STIR markets, SOFR, and OIS help identify when the market is offsides, and contrasts this with the old floor-trading era, where tick size and liquidity mattered more. Historical analogs: 1990s, 2008, and 2020 (Priority: 4/5): They compare current conditions to the 1990s productivity boom and discuss how lessons from the 2008 crisis and COVID response shaped their views on policy backstops and market rebounds. Optimism, sentiment, and avoiding doom narratives (Priority: 4/5): Both reject persistent doomism; they argue traders should remain neutral, price-driven, and willing to be wrong quickly rather than anchor to bearish ideology or social-media fear cycles.

Key Arguments: The market was too aggressively priced for multiple Fed cuts; the post-FOMC hawkish tone was a rational repricing rather than a true regime shock. The SEP/dot plot should be read as a statement of intent, not a precise forecast; it reveals how the Fed wants to respond to evolving data. The U.S. economy appears mid-cycle, supported by productivity, labor strength, and investment, rather than being on the brink of recession. Bond trades should be viewed through a 3-6 month lens; immediate post-FOMC noise is less important than how inflation and labor evolve into the next meetings. Labor market risk is thinly balanced: unemployment can deteriorate quickly, and if it does, the Fed may be forced into more cuts than currently priced. Modern rate markets can be read through SOFR/OIS spreads, curve pricing, and momentum; these tools help identify when consensus is becoming crowded or wrong. Doom narratives often overstate risk; both speakers argue that policy backstops, fiscal stimulus, and the structure of the U.S. economy make catastrophic bearish calls hard to sustain. For traders, being wrong quickly is better than being stubbornly attached to a bearish thesis; P&L is direct feedback on whether the market agrees. The 1990s comparison is driven by productivity, strong labor, and capital investment; current conditions may rhyme with that era more than with late-cycle downturns. Housing is a key watchpoint: construction employment remains firm, but mortgage rates and housing weakness could become an inflection point for the economy and bonds.

Data Points: FOMC cut expectation: 25 bps - Both speakers discussed going into the meeting expecting a quarter-point rate cut. Market pricing into FOMC: ~96% probability of a cut - Donnie noted the market was heavily priced for a cut, making no-cut outcome highly disruptive. Cuts priced for 2025: 2 cuts - Donnie’s call ahead of the meeting was that 2025 would be priced for only two cuts. Treasury position: Long 10-year futures at average 4.44 - David disclosed entering with a long ten-year futures position, averaging a 4.44 yield equivalent after scaling in. Ten-year entry levels: 4.39 and 4.49 - David said he bought earlier in the week at 4.39 and added at 4.49. Core PCE forecast: 0.101% m/m - David’s estimate for November core PCE, below consensus. Consensus core PCE: 0.13% m/m - David cited the street consensus ahead of the data release. Unemployment rate: 4.2% rounded; just under 4.3% unrounded - Used by both to argue the labor market is still firm but close to a threshold. Fed comfort zone for unemployment: 4.4% - David said the Fed’s comfort zone is around this level. Historical credit spread comparison: Lowest since 1997 - David used tight credit spreads as evidence of a strong mid-cycle economy. Productivity in 2023: Off the charts - David cited exceptional productivity as part of the mid-cycle/90s analogy. Stimulus scale during COVID: ~20% of GDP - David said pandemic-era stimulus was roughly this magnitude. Bond market move after election: 5 full points up and 5 full points down - Donnie highlighted the large round-trip in 30-year bonds after the election. Old floor-trading size: 400-500 Eurodollars, up to 1,000 lots - Donnie described his historical floor-trading sizes and how profit expectations changed with tick structure. Scale ecosystem metrics (ad read): 46 million active wallets / 750 million+ transactions / $9 billion saved - Promotional segment for Scale blockchain, not part of the discussion.

Pivotal Quotes: "I think the market took his comments worse than reality, per se, because he didn't have a smooth presser." — Donnie: Explaining why the post-FOMC reaction felt overdone relative to the actual policy move. "The SEP and the projections are simply that, statements of intent." — David: Clarifying how to interpret Fed forecasts and dot plots. "It's kind of hard to be short America." — David: Arguing that the underlying structure of the U.S. economy remains constructive over time.

Implications: Listeners should expect more two-way volatility in rates, with the next few inflation/jobs prints likely to drive repricing. The episode argues for a mid-cycle lens: bonds may rally again if labor softens, but traders should stay flexible and avoid anchoring to doom.