James Brodie
Head of Learning & Development, Flux
Impending Fed Pivot, US Investors Deviate, Global Disinflation Broadens
Fed pivot nears as inflation cools. Crowded USD longs may unwind, supporting gold while markets overprice rate hikes.
THE FED PIVOT IS CLOSER THAN THE MARKET THINKS - AND THE DOLLAR'S RALLY IS ABOUT TO CRACK
Warsh's tone yesterday was telling - inflation risks "have come down in recent weeks," and both inflation data and market pricing back that up. US 2-year inflation expectations have collapsed from 3.4% in March to 1.99% (Chart 1: Bloomberg). Gold jumped on the comments, briefly trading above $4,100 after rebounding from an intraday low of $3,960. The 1-year US inflation swap has fallen from a May peak of 3.5% to ~2.1%, reinforcing that inflation concerns are genuinely fading - not noise, but a real disinflation impulse, helped along by easing energy prices.
Yet OIS markets are still pricing ~36bp of hikes by year-end. I think that's simply wrong, and it's a sell.
ISM manufacturing remains comfortably above 50 and new orders are still expanding - resilient growth that would normally argue for hawkish caution. But input prices are easing, and that's the more important signal: inflation pressure is fading even as activity holds up. All eyes now turn to today's payrolls, with consensus at 110k and unemployment at 4.3%.
A few things support the turn:
→ The long-USD trade is crowded. Speculative USD longs hit $34.3bn as of June 23rd - the highest in 18 months, tripling in just 7 weeks (Chart 2: CFTC, Bloomberg). Positioning like this rarely ages well once the narrative turns.
→ Capital flows are already shifting. US investors sent a record amount of capital into foreign stocks and bonds in April - a break from the usual "flight to the US" playbook seen in past shocks (Chart 3: Haver Analytics). That's not what dollar strength looks like under the hood.
→ US tech leadership isn't the problem - rate pricing is. Korean semiconductor exports remain robust (Chart 4: Steno Research, Bloomberg & Macrobond), signalling the global chip cycle - and by extension US AI/tech demand - is far from rolling over. This is a rates and positioning story, not a US-growth-scare story.
→ Global disinflation is broadening. Eurozone June inflation surprised to the downside (2.8% vs 3.0% consensus), core down to 2.4%. BoE's Bailey has signalled no urgency to hike. Several central banks are adopting a more cautious stance.
→ The global backdrop argues for caution too. Japan's 10-year JGB yield sits at 2.77%, just 4bp off cycle highs as debt concerns resurface, while China's real residential property prices have crashed to a 20-year low (112 in 2021 to 85 in Q1 2026), (Chart 5: China new built residential property prices YOY), with 35 straight months of year-over-year declines. Global growth is far more fragile than US equity strength suggests.
Conclusion: Put it together and I don't see the Fed hiking this year. The dollar's strength is topping out and starting to reverse, and gold and precious metals - treated as a sell on the back of Fed hawkishness and USD strength - are set up to rally as that repricing plays out. Fading the 36bp of priced hikes, fading USD strength, and buying precious metals on weakness is the trade. Positioning ahead of consensus here feels like the right side of the market.
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