The Fed Will Not Truncate This Business Cycle or Succeed in Its Price-Stability Mandate

Happy Friday out there, Team 42. It's your skipper here, Darius Dell, to present our Macro Minute for Friday, October 2nd, 2026. Jobs Report Friday, Big Friday. So as always, we'll start with the executive summary from today's lead-off warning notes, so let's dive right in. So what was the most important thing we learned today? Is that the U.S. labor market will likely prevent the Fed from truncating this business cycle and seceding on its price stability mandate. What key macro data or policy signals supported our active themes? The September private sector employment and private sector average weekly hours data supported our jobless recovery and productivity boom themes. The private sector average hourly earnings data supported our cooling housing and labor theme. The private sector labor income data, which is the sum product, the frequency-adjusted sum product of all those metrics, supported our jobless recovery and productivity boom themes. And then lastly, the September construction spending data supported our resilient U.S. economy and paradigm C, a.k.a. run-it-hot themes. What key macro data or policy signals challenged our active themes? The September auto sales data did not support our resilient U.S. economy or paradigm C a.k.a. run-it-hot themes. So what does all this mean for your portfolio? U.S. dollar money markets are currently pricing in three rate hikes over the next 12 months. Our revised base case calls for one more rate hike in December, followed by one to 200 basis points of rate cuts through 2027 and 2028. A Fed that play action passes, i.e. tight and cyclically, to set up the run, i.e. ease structurally, is a Fed that understands its role in countering the geopolitically driven supply-demand imbalance in the treasury bond market. U.S. dollar money markets currently view the Fed's policy rate setting as modestly accountable to the U.S. dollar money market. According to the 42 macro market implied Fed neutral rate model, it must hike by one to four times to get back to neutral. The mean of 42 macro's five 10-year nominal treasury fair value models is currently 6.07 percent, 82 basis points higher than last price. If the Fed does not take incremental action to truncate its still accommodative policy setting, the market will likely continue to sell treasury bonds until Besant via TGA-funded buybacks, Warsh via bank deregulation or yield curve control, or Besant, Warsh, and Zervers via Fed Treasury Accord 2.0 are forced to buy them. A Fed Treasury Accord 2.0 may feature reserve management purchases as unlimited funding for TGA-funded buybacks in defense of the Fed's congressionally mandated third objective, moderate long-term interest rates. This outcome would be structurally bullish for stocks, gold, and Bitcoin. So as always, a wrap-up with a question from our community. It says, thoughts on long-duration linked bonds, LTPZ, yielded 6.57 percent, inflation linked, very enticing. Thoughts, DD? I don't have a 10-foot pole, but if I did have a 10-foot pole, I would take LTPZ and just shove it away like this. Don't buy bonds when the sovereign is buying the bonds for you. Let me say that again. When the sovereign buys its own bonds for you, which is we think it will be doing in 2027, you do not need to also buy the bonds. You should move further out on the risk spectrum and take advantage of the fact that the sovereign is going to create money to tame its own bond volatility. And so that's our belief as it relates to the outlook for 2027 and 2028. Obviously, we've got to get through the near-term chop associated with incremental policy tightening, this backup of bond volatility, which is going to drain liquidity. We've already seen the impact of the drain of liquidity in the credit markets. It may spill over into the equity markets and the crypto markets in the coming weeks and months. If that does occur, we're going to think that is a transitory pullback, a transitory tantrum, if you will, that will pull forward this incremental policy intervention that we're expecting in 2027. So eyes on the prize. If the markets are trading poorly in the next few months, just understand that this is more than likely to be a buying opportunity than the end of this market cycle. So we'll wrap it up there. Darius here presenting our macro minute for Friday, October 2nd, 2026. Best of luck out there today. And everyone, have a great weekend. We'll catch you back here on Monday. Cheers. If you enjoyed this content, please remember to like and subscribe. Thank you. This content is for informational purposes only and does not constitute an offer or a solicitation. Reliance upon the information in this material is at the sole discretion of the viewer or listener. Investing involves risks. Any reference to a company, issuer, or investment strategy is for instructive purposes only and does not constitute investment advice. For full disclosures, visit 42macro.com backslash disclaimer. Thank you.