Why We Think the Fed Ends Up Cutting, Not Hiking, Inside Six Months
Strategy Inc is running out of room to wait and see who is right.
The Fed's own dot plot just turned more hawkish. The bond market has spent the two weeks since telling it that it is wrong. We think the bond market wins this argument within six months, and Strategy Inc is running out of room to wait and see who is right.
The FOMC Got More Hawkish. The Bond Market Already Disagrees.
On June 17, the Fed held rates at 3.50 to 3.75 percent and released a dot plot that moved in the opposite direction of what most of the curve wanted: the median 2026 year end projection rose to 3.8 percent, up from 3.4 in March, with nine of nineteen officials now penciling in at least one hike. New Chair Kevin Warsh called the committee’s tone unambiguous. Bank of America responded by calling for three hikes. We laid out our objection to that premise two editions ago: hiking against 39 trillion in government debt transmits through the interest income channel before it transmits through demand destruction. The bond market has been casting its own vote since. The ten year has fallen from 4.509 to 4.372 in the two weeks since that meeting, breaking decisively through the 4.44 percent level that has acted as the pivot between the bull and bear case on yields for most of this year. The two year, five year, and thirty year have all moved the same direction. The Fed says hike. The curve says cut. One of them is going to be wrong, and it usually is not the bond market.
Equities Are Rolling Over
The technical picture across the major indexes is starting to match the yield curve’s message. QQQ closed the week at 706.52, down 4.60 percent, its sharpest weekly decline since the spring correction, slipping from a recent high near 745 and now testing the 690 bull/bear pivot from above for the first time since that level was reclaimed. The pattern across the last twelve months has been a series of sharp corrections followed by higher highs. What we are watching for now is the opposite: a series of lower highs, each rally weaker than the one before it, which is the technical signature of a market transitioning from trend to range, or range to decline. Nasdaq futures are down 4.86 percent year to date from their most recent peak. We are not calling a top. We are saying the structure of this rally is changing, and a market pricing three more hikes into that structure is pricing the wrong regime.
Why We Think the Fed Ends Up Cutting, Not Hiking, Inside Six Months
We have made this case before and we are making it again because the data keeps confirming it rather than refuting it. Real GDP growth is now projected at just 2.2 percent for 2026, the Fed’s own number, down from prior projections, even as the median dot moves toward another hike. Housing is the clearest transmission point: the average 30 year fixed mortgage has held in the high 6 percent range for months with no relief, existing home sales remain depressed, and home price growth is decelerating into outright softness in a growing number of metro markets. A Fed that hikes into decelerating growth and a softening housing market is not fighting inflation, it is manufacturing the conditions for the cut it will need to deliver six months from now. We think the committee ends 2026 closer to cutting than hiking, and that the next two payroll and housing prints matter more to that path than anything in this week’s dot plot.
The K-Shaped Economy Is Why the Aggregate Numbers Lie
Part of why this is so hard to see in the headline data is that the headline data increasingly describes two different economies. The top 10 percent of US earners now account for roughly half of all consumer spending, up from closer to 35 percent in the early 1990s, according to a recent Moody’s Analytics review of Federal Reserve data. Split by income quintile rather than decile, the story sharpens further: personal outlay growth for the top 20 percent has run at 8.3 percent since the pandemic against 4.5 percent for the bottom 80, with CPI inflation of 3.9 percent sitting almost exactly between the two. The top of the distribution has been spending through asset gains and is largely insulated from the financing cost of a 4 percent plus mortgage rate. The bottom 80 percent is not, and that segment is where a hiking cycle actually bites. An aggregate growth number built on top decile spending can look resilient long after the majority of households underneath it have already slowed down.
MSTR: mNAV Below 0.80x and Out of Good Options
Strategy Inc’s mNAV, the ratio of the company’s market value to the dollar value of its bitcoin holdings, closed the week at 0.79x. Below 1.0x, the mechanism that built this trade runs in reverse: issuing new shares no longer grows bitcoin per share, it dilutes it, because the company is selling equity for less than the bitcoin backing it is worth. MSTR is now down 45.8 percent year to date, materially worse than bitcoin’s own 31.6 percent decline, the leverage embedded in the structure cutting against holders on the way down the same way it flattered them on the way up. We have written about the STRC preferred stock’s negative convexity for months, and that mechanism is now compounding with this one: a market that will not fund new bitcoin purchases at an accretive price, and a preferred stock that gets more expensive to defend the lower everything else falls. Strategy’s own usual levers, common equity issuance and STRC issuance, are both constrained at the same time, by the same underlying cause. We do not see a clean way out of this that does not involve selling more equity at a discount, selling more bitcoin outright, or both.
