Show Notes
Tech credit default swaps have doubled from 50 to 100 basis points, Meta's free cash flow has just turned negative, and French spreads to Germany are back at European debt crisis levels. Four of the G7 central banks meet this week, and the market is trying to decide whether this is the end of the AI bull market or just the first real test of who gets to borrow.
The bigger thread is the competition for capital. Net equity issuance was negative for two and a half decades, then turned sharply positive in the last two quarters. Add heavy corporate bond supply and governments running deficits of 5.5 to 6%, and everyone is queuing up for the same investors.
Elvis and Jonny Matthews unpack why the AI build out is pushing up the cost of capital, what the French bond blow-out means for Europe, and why the central banks are likely to hold now and signal a hike in December. You may also notice that Jonny isn't in our usual London studio this week, instead he's joining us remotely from Vegas.
In this episode: Why Jonny closed his S&P 500 put spreads and does not think the AI bull market is over Neo cloud stress: shares roughly half their summer level and bonds at 80 cents on the dollar Hyperscaler free cash flow turning negative as Meta lifts capex guidance to 135 to 145 billion Jevons Paradox in AI: token prices falling while corporate spend grows 300 to 500% a year Tech sector five year CDS doubling from 50 to 100 basis points Net equity issuance, bond supply and sovereign borrowing all competing for the same capital French ten year spreads to Germany, and why Jonny and Elvis disagree on Le Pen and the election The Fed, Bank of Canada, ECB and Bank of Japan all expected to hold, with a December hike on the cards
Jonny has spent 25 years trading macro at the highest institutional level. This is not retail speculation or headline chasing. It is rigorous, independent analysis from someone who has sat at the table.
New to SuperMacro? Get 30 days of our Daily Note entirely free at www.super-macro.com
0:00 Cold open: will France's problem stay isolated? 0:26 Welcome, with Jonny in Las Vegas 1:10 Is this the end of the AI bull market? 2:05 Neo cloud stress: shares halved, bonds at 80 cents 3:17 Hyperscaler free cash flow turns negative 4:11 Meta lifts capex guidance to 135 to 145 billion 5:04 Cost of capital and the return on AI spend 5:35 Jevons Paradox and surging token usage 7:08 Ramp data: AI spend per employee 7:54 Will the neo cloud problems spill over? 8:15 Tech CDS doubling from 50 to 100 basis points 9:04 Governments and companies competing for capital 10:02 Net equity issuance turns sharply positive 11:26 Why yields have to stay higher 12:08 $1 trillion of AI spend, around 3% of GDP 13:42 The French sovereign debt blow-out 14:32 Spain and Italy: why they look healthier 15:26 Moody's, the French budget and the 2027 outlook 16:01 Elvis and Jonny disagree on France and the ECB 17:00 Le Pen and the election 17:55 Net debt to GDP against bond yields 19:27 Hot inflation prints and PPI leading CPI 19:52 Fed, BoC, ECB and BoJ expected to hold 21:01 Are the October meetings a nothing? Warsh and Fed guidance 22:53 Sign-off and the Daily Note Hosted by Simplecast, an AdsWizz company. See https://pcm.adswizz.com for information about our collection and use of personal data for advertising.
More from Super-Macro Management
The US Treasury is buying back $4 to 6 billion of long dated bonds at a time, against $5.4 trillion outstanding and $900 billion of new issuance every year. Jonny calls it a pea shooter pointed at a battleship. Bonds made last week’s front cover of The Economist, a cover with a record of marking turns. When everyone is suddenly worried about the long end, where does it go next?
France's deficit is heading for 5.4% this year, the government's plan to cut it to 5% is unlikely to survive the National Assembly, and a presidential election lands in April. French yields keep climbing, the two year Bund now yields 175 basis points less than Treasuries, and the VIX hasn't moved. The Nasdaq hit an all time high on Friday.
The 30 year Treasury yield traded above 5.5% this morning. The 10 year is now clean through 5%, a level that held as a ceiling for two years. Whatever was capping yields broke last week, and Jonny doesn't think it's coming back.
The Fed hiked 25 basis points last week, and the market's answer was to rally. The S&P is up 3.5% since the meeting, the Nasdaq 4.5%. Retail sales control group spending jumped 1.4% in August against a forecast for half a percent. Whatever that hike was meant to do, it isn't slowing anything down yet.
Oil is up roughly 12% over the past week, hitting a US economy already at full capacity, 4.1% unemployment and payrolls averaging 106,000 a month. That's the kind of shock that turns into services and core inflation rather than fading on its own. Fed funds futures already price an 87% chance of a hike this week. The real question is what happens to the other 75 basis points still priced in after that. The other supposed backstop already cracked. Bessent had promised to at least double the Treasury's bond buybacks, with the street expecting 5 to 7.5 billion. The first operation only spent 3.6 billion against 10.5 billion of bonds dealers offered, because Bessent wouldn't pay up for the rest. The 30 year yield broke through 5% anyway, and the 10 year touched a level it hasn't held since 2007. Jonny sits down with Andy Constan, founder and chief investment officer of Damped Spring Advisors and his former boss at Salomon Brothers, to unpack why the sell-off has further to run, why Treasury's own supply games matter more than talk of QE, and why he thinks the real fault line is the private credit funding the AI buildout, not the bond market. In this episode: Oil up around 12% last week, landing on an economy at 4.1% unemployment and 106,000 average monthly job growth Treasury's buyback boost landing at 3.6 billion spent against 10.5 billion of bonds on offer The 30 year yield through 5% for the first time in years, the 10 year testing a level not held since 2007 An 87% priced chance of a hike this week, and what happens to the other 75 basis points priced in after that Term premium on the 10 year at 90 basis points, up from minus 50 in the 2020 bubble Why long dated TIPS look like the better trade than nominal Treasuries right now Every major bond deal funding the AI buildout, an 80 billion Google raise included, still trading underwater Jonny has spent 25 years trading macro at the highest institutional level. This is not retail speculation or headline chasing. It is rigorous, independent analysis from someone who has sat at the table. New to SuperMacro? Get 30 days of our Daily Note entirely free at www.super-macro.com 0:00 Intro: this week's G7 bond sell-off and rate repricing 0:58 No Elvis this week, and introducing guest Andy Constan 1:55 The three forces behind the sell-off: fiscal, inflation, and hyperscaler issuance 4:46 Oil up 12%, landing on an economy already at full capacity 6:18 The CPI print, and why PCE inflation isn't getting to target this year 7:24 Treasury's underwhelming buyback announcement 9:11 Inside the first buyback operation: 10.5 billion offered, 3.6 billion spent 10:32 The ECB's hawkish meeting, and why the Fed can't afford to lag behind 11:58 The 10 year touching 5% for the first time since 2007 12:23 The 30 year through its cap, and how high it could still go 13:58 How much hiking is priced into the UK, eurozone and US 16:13 Why current yields aren't as extreme as they look against nominal GDP growth 19:04 Andy Constan: why the Fed has boxed itself into a corner 23:24 How much of the global hiking cycle is already priced in 25:14 Why the dot plot probably won't match what's priced into the curve 27:25 What actually moves the long end: growth and inflation expectations, not supply 28:20 Term premium then and now, and the case for long dated TIPS 30:23 Treasury's buybacks, the November refunding deadline, and Bessent's Yellen U-turn 37:06 The hedge: foreign stocks, gold, and a short dollar 38:10 Why equity valuations hinge on earnings expectations that may not hold 42:51 Every major AI-linked bond deal still trading underwater