Is Risk-On Too Risky? | Macro Mondays: August 31, 2026

The episode opens with discussion of Fed Chair Kevin Walsh's Jackson Hole speech, which was perceived as hawkish by many market commentators. However, Andreas's language processing model analysis reveals the speech was neither notably more hawkish nor dovish than recent Fed communications. A key surprise was Walsh's reaffirmation of PCE (Personal Consumption Expenditures) as the primary inflation metric to track, after ambiguity following the July press conference.

Andreas presents substantial analysis of the PCE-CPI divergence, noting it represents the second-largest spread since 1960, with only 1983 surpassing it—a year characterized by inflation falling off a cliff. He argues CPI is the directional guide while PCE lags in capturing inflation trends, attributing differences to PCE's focus on PPI categories and lower weighting of shelter costs, which have softened in summer. He suggests PCE is about to roll over, making Walsh's reinstatement of PCE focus poorly timed.

Regarding rate hike expectations, Andreas addresses Morgan Stanley's "cry wolf" concern—that without action, Walsh risks credibility on inflation rhetoric. The conversation explores whether a September rate hike is necessary and positions it as a mid-cycle adjustment rather than the start of a full hiking cycle. Andreas notes market expectations for multiple hikes despite Walsh explicitly stating he won't forward guide, and describes the period before midterms as "wobbly" with potential for volatility.

The discussion turns to Middle East geopolitics and energy markets. Weekend attacks on Larak Island targeting Iranian rocket launches designed to deploy sea mines are contextualized as part of the Strait of Hormuz dispute rather than broader military escalation. Andreas criticizes market overreaction and recommends shorting energy prices following escalations rather than buying into inflation narratives. He emphasizes crack spreads (the gap between crude oil and refined products) as a key deflation mechanism, noting that regaining Middle Eastern refinery capacity could unlock significant headline disinflation into Q4 and Q1.

The conversation includes analysis of the South Korean export-to-ISM manufacturing spread, described as the largest seen in 2026, attributed to AI-driven chip exports and construction-related job creation. Andreas predicts the upcoming ISM manufacturing report will surprise significantly to the upside, near 58 versus consensus of 55.2. He contextualizes the recent negative non-farm payroll print, arguing that structural changes—fewer migrants and a break-even job creation rate of ~30,000 monthly—make negative prints normal rather than concerning.

Finally, Andreas discusses the transatlantic inflation spread favoring ECB hawkishness relative to Fed policy, predicting the ECB may out-hawk the Fed in September despite potential rate hikes from both. He advocates for a short dollar trade, supported by euro strength and potential Treasury buyback operations by Scott Bessent on September 9th.