Sive Morten
Special Consultant to the FPA
- Messages
- 22,091
FUNDAMENTALS
So, this week K. Warsh has set the new vector in the Fed policy that doesn't quite match to markets expectations. From this point of view recent ECB rate change starts looking as a weaker driving factor for EUR. Our initial suggestion was the Fed remains on hold until 2027, but with the recent comments situation has become more dollar supportive. ECB members are keep talking about another rate move in July, but it is not the fact that it definitely will happen. Besides, if the Fed i just stepping in the tightening policy, who much ECB will hike the rate more? One, maybe two times. It means that dollar could turn to growth earlier than we suggested. And the data that we will get in the nearest two months might be very important.
MARKET OVERVIEW
The Bank of Japan may raise interest rates twice by the end of the current fiscal year, after making a landmark shift in its policy focus toward mounting inflation risk, former board member Makoto Sakurai said on Friday. The central bank justified Tuesday's decision to raise its short-term policy rate to a 31-year high of 1% to forestall the risk of underlying inflation exceeding its 2% target. That contrasted with the way the bank explained past hikes as reflecting confidence in progress toward durably achieving its 2% target.
The U.S. dollar index hit a one-year high on Thursday after a hawkish tilt by the Federal Reserve led traders to ramp up bets on rate increases this year. The Fed held interest rates steady as expected on Wednesday, but new projections and comments from Warsh, who was presiding over his first meeting as chair, blindsided traders and led markets to price in a possible hike within months. Investors are now confronting a more opaque Fed under Warsh, one that is retreating from forward guidance and overhauling its messaging - a shift that could inject fresh volatility into markets.His first policy statement dropped guidance on the future path of rates, while he signalled possible changes to how the Fed communicates, interprets data and approaches inflation.
One immediate change was a stripped-down monetary policy statement that omitted potential near-term actions, echoing the format used by former Fed Chairman Alan Greenspan who sat at the helm of the central bank from 1987 to 2006.
Warsh said financial markets should price securities based on their own reading of the economy rather than trying to anticipate policymakers' views of the data. The statement, in an early sign of new Fed Chairman Kevin Warsh's influence, removed any guidance about future rate moves altogether, with a revised format that simply stated the rate decision and reaffirmed the central bank's intent to keep "ample reserves in the banking system."
Warsh also announced a review of the Fed's operations, including its balance sheet, communications, data sources, productivity and jobs, and its inflation framework.
A more hawkish Fed could cool a long-running equity rally by lifting borrowing costs for companies and consumers, while driving up the dollar and bond yields.
Recent data have shown inflation running well above the Fed's 2% annual target, a target that Warsh reaffirmed on Wednesday. Wednesday's meeting boosted the market's hawkish bets. The Fed's quarterly projections showed nine Fed officials now anticipate a hike in rates by the end of 2026.
Warsh's emphasis in a press conference on price stability was interpreted as hawkish by markets, said Josh Jamner, senior investment strategy analyst at ClearBridge Investments. Fed funds futures late on Wednesday suggested a better than even odds of a hike at the central bank's September meeting, according to CME FedWatch. The Fed funds futures market is pricing in 68% odds of a rate hike by September, LSEG data showed.
The Fed statement showed the outlook for inflation was marked up from 2.7% for the end of 2026 to 3.6%. Updated interest rate projections showed nearly half of policymakers now expect a hike this year as inflation concerns mount, although the new Fed chair did not provide his view. A stronger U.S. economic growth outlook is adding to rate hike expectations, with the last three payrolls reports showing much higher monthly jobs gains than economists had predicted. Data on Thursday showed the number of Americans filing claims for unemployment benefits fell last week as layoffs remained low.
However, some investors say the reaction to Wednesday's meeting may be overdone, saying they doubted that rate hikes were imminent. Warsh himself did not participate in the rate projections that precipitated some of the hawkish response. A key factor for investors was lower oil prices, with U.S. crude falling to roughly $75 a barrel by Wednesday in the wake of the U.S.–Iran deal over the weekend.
Investors will get a key U.S. inflation update on the heels of a Federal Reserve meeting that prompted a hawkish market reaction. The personal consumption expenditures (PCE) price index, due on June 25, follows Fed projections that core PCE will end the year at 3.3%, well above the 2% target.
The European Central Bank has taken the first step to contain price pressures, but it is increasingly clear that more needs to be done, Slovak central bank chief and ECB policymaker Peter Kazimir said. The ECB raised interest rates for the first time in nearly three years on Thursday in an effort to curb inflation before a surge in energy costs triggered by the U.S.-Israeli war on Iran spreads more broadly across the euro zone.
European Central Bank policymaker Joachim Nagel said there would be no immediate relief from an energy-driven spike in inflation even if the Strait of Hormuz reopens soon because it will take months for oil supply to recover to its pre-war level. But Nagel reaffirmed his view that all options - meaning both holding interest rates steady or increasing them - remain for the central bank's next policy meeting on July 22 to 23.
The European Central Bank may raise interest rates one more time as soon as next month if it sees more evidence of euro zone inflation spreading beyond energy, ECB policymaker Pierre Wunsch told Reuters, even as the U.S.-Iran deal dents oil prices. The euro zone's central bank may still need to raise rates again if inflation rises in sectors such as services - and even if that move may end up being reversed.
The ECB's Chief Economist Philip Lane told Reuters earlier this week the bank would continue to be "proactive" in its fight against high inflation even after the Iran deal.
He said he had even warned colleagues last week about the risk of an oil glut within a year, potentially pushing crude prices below pre-war levels. He believes, however, that the ECB could go beyond its mantra that it makes decisions “meeting by meeting” depending on the data, saying “at some point it would not mean anything”. Instead he advocated giving conditional guidance.
Financial markets now see between one and two more hikes in the ECB's 2.25% deposit rate, with the next move fully priced in by October. The ECB earlier estimated that the neutral interest rate - the level that neither stimulates nor brakes growth - is between 1.75% and 2.50%, so another hike would put the deposit rate at the top end of estimates.
Meantime, Europe's banking sector could boost lending by more than €2 trillion ($2.2 trillion) if regulators were to simplify rules while maintaining financial resilience, the head of Spanish banking association AEB, Alejandra Kindelan, said on Friday. AEB and fellow associations CECA and UNACC flagged that regulatory complexity and overlapping capital requirements were constraining banks' ability to finance growth. The FT, citing a draft European Commission report, reported on Friday that the EU was set to remove barriers preventing banks from moving funds across the bloc. Europe's banks last week also urged simpler rules to help them finance growth after saying that Europe faced a widening €1.4 trillion ($1.62 trillion) annual investment gap.
Here EU is trying to follow the Fed that mostly denied Basel III Banking capital solvency rules and also steps on the way of easing demands for the banking capital and their reserves with the Fed. Large U.S. banks formally pitched the central bank on tweaks to a regulatory proposal aimed at reducing funds they must set aside to absorb potential losses, as the central bank enters the last leg of a marathon overhaul of U.S. capital rules. U.S. regulators led by the Federal Reserve in March unveiled new relaxed drafts of sweeping capital rules, which they estimated would reduce big banks' loss-absorbing capital by around 4.8%, arguing the current rules are hurting the economy. The so-called 'Basel' rules overhaul how banks measure their risk and in turn how much capital they need.
These processes tells that the EU and the US growth meets serious problems and lack of internal reserves to support it. So, governments and Central Banks start to search any other ways to support it, reducing solvency capital ratios.
LET'S GO FURTHER...
So, inflation in the USA has noticeably accelerated since the start of the "Epic Rage" operation in Iran, but now Trump may hint to Warsh that the rate can still be actively lowered, as an agreement with Iran has been reached and prices for everything will soon plummet as he actually did last week. Clearly, this cunning plan is multifaceted. In general, the market has clearly relaxed - more money was printed, indices have reached new historical highs. But bonds are somehow depressing. Either due to inflation fears, or still due to a shortage of dollar liquidity in the global system. Because futures are one thing, and real deliveries, for which dollars are still needed, are another.
Well, the first press conference of the new Fed head Jerome Powell took place ... we heard the "old good hawk" Warsh [as we remember him 15 years ago]. Markets, of course, are a bit shocked by what they heard ... they are beginning to realize that no one will lead them by the hand to the trough anymore ... the cost of risk - up, markets - down. Warsh:
Forward guidance is no longer, the Fed will only give facts in the press release, not setting the direction. Warsh officially confirmed that the Fed will stop publishing its own expectations for the rate in the updated Dot Plot. He stressed that excessive information (forward guidance) harms the Fed's policy, depriving it of flexibility.
Markets should assess the information and risks themselves, not constantly looking at what the Fed thinks.
Inflation is a choice ... the committee is unambiguously and unanimously committed to this ... this is the main thesis, they said little about the labor market, almost nothing. In fact, this means a shift in favor of achieving the inflation target, here Warsh is definitely more of a "central banker" than the previous three ones. Warsh's approach to reform is generally in his style - he wants to make the Fed adopt the changes itself and developed.
Trump was happy already that they have kept rates intact at least - "it's good that they kept the rates". Because 9 out of 18 officials expect at least one rate hike this year. The Fed lowers its median forecast for US GDP in 2026 from 2.4% to 2.2%. The Fed now believes that consumer spending inflation will not return to the target level of 2% until 2028.
The Fed's final statement was shortened by almost three times - from 341 words to a concise 132. Any hints of a possible easing or rate cut in the future were completely cut out of the text. Instead, the emphasis is on the final phrase: "The Committee will ensure price stability". All new Fed chiefs without exception are met by the market with a fall. The forecast for the rate in 2026 rose from 3.4% to 3.8%, and for 2027 from 3.1% to 3.6%. The forecast for inflation in 2026 was raised from 2.7% to 3.6%, for core inflation from 2.7% to 3.3%, and in 2027 from 2.2% to 2.5%. This means that most expect one rate hike this year... and 6 FED members predict a rate above 4% this year.
Meantime, while all eyes were on Warch and its speech, in the US there are two interesting reports were published. First is, the gap between the US unemployment rate and headline CPI has narrowed to just 0.1 percentage points, the smallest since 2022. This comes as inflation rose to 4.2% in May, the highest since April 2023, while the unemployment rate stood at 4.3% in March, April, and May. Historically, periods when this gap has approached zero have often been followed by Fed rate hikes.
The most recent example includes 2021-2022, when inflation exceeded the unemployment rate for 22 months. This prompted the Fed to hike rates by 5.25 percentage points to 5.5% between March 2022 and July 2023, the highest since 2001. Inflation is back at the center of the Fed's attention.
So, this week K. Warsh has set the new vector in the Fed policy that doesn't quite match to markets expectations. From this point of view recent ECB rate change starts looking as a weaker driving factor for EUR. Our initial suggestion was the Fed remains on hold until 2027, but with the recent comments situation has become more dollar supportive. ECB members are keep talking about another rate move in July, but it is not the fact that it definitely will happen. Besides, if the Fed i just stepping in the tightening policy, who much ECB will hike the rate more? One, maybe two times. It means that dollar could turn to growth earlier than we suggested. And the data that we will get in the nearest two months might be very important.
MARKET OVERVIEW
The Bank of Japan may raise interest rates twice by the end of the current fiscal year, after making a landmark shift in its policy focus toward mounting inflation risk, former board member Makoto Sakurai said on Friday. The central bank justified Tuesday's decision to raise its short-term policy rate to a 31-year high of 1% to forestall the risk of underlying inflation exceeding its 2% target. That contrasted with the way the bank explained past hikes as reflecting confidence in progress toward durably achieving its 2% target.
The U.S. dollar index hit a one-year high on Thursday after a hawkish tilt by the Federal Reserve led traders to ramp up bets on rate increases this year. The Fed held interest rates steady as expected on Wednesday, but new projections and comments from Warsh, who was presiding over his first meeting as chair, blindsided traders and led markets to price in a possible hike within months. Investors are now confronting a more opaque Fed under Warsh, one that is retreating from forward guidance and overhauling its messaging - a shift that could inject fresh volatility into markets.His first policy statement dropped guidance on the future path of rates, while he signalled possible changes to how the Fed communicates, interprets data and approaches inflation.
One immediate change was a stripped-down monetary policy statement that omitted potential near-term actions, echoing the format used by former Fed Chairman Alan Greenspan who sat at the helm of the central bank from 1987 to 2006.
Warsh said financial markets should price securities based on their own reading of the economy rather than trying to anticipate policymakers' views of the data. The statement, in an early sign of new Fed Chairman Kevin Warsh's influence, removed any guidance about future rate moves altogether, with a revised format that simply stated the rate decision and reaffirmed the central bank's intent to keep "ample reserves in the banking system."
Warsh also announced a review of the Fed's operations, including its balance sheet, communications, data sources, productivity and jobs, and its inflation framework.
A more hawkish Fed could cool a long-running equity rally by lifting borrowing costs for companies and consumers, while driving up the dollar and bond yields.
Recent data have shown inflation running well above the Fed's 2% annual target, a target that Warsh reaffirmed on Wednesday. Wednesday's meeting boosted the market's hawkish bets. The Fed's quarterly projections showed nine Fed officials now anticipate a hike in rates by the end of 2026.
Warsh's emphasis in a press conference on price stability was interpreted as hawkish by markets, said Josh Jamner, senior investment strategy analyst at ClearBridge Investments. Fed funds futures late on Wednesday suggested a better than even odds of a hike at the central bank's September meeting, according to CME FedWatch. The Fed funds futures market is pricing in 68% odds of a rate hike by September, LSEG data showed.
The Fed statement showed the outlook for inflation was marked up from 2.7% for the end of 2026 to 3.6%. Updated interest rate projections showed nearly half of policymakers now expect a hike this year as inflation concerns mount, although the new Fed chair did not provide his view. A stronger U.S. economic growth outlook is adding to rate hike expectations, with the last three payrolls reports showing much higher monthly jobs gains than economists had predicted. Data on Thursday showed the number of Americans filing claims for unemployment benefits fell last week as layoffs remained low.
However, some investors say the reaction to Wednesday's meeting may be overdone, saying they doubted that rate hikes were imminent. Warsh himself did not participate in the rate projections that precipitated some of the hawkish response. A key factor for investors was lower oil prices, with U.S. crude falling to roughly $75 a barrel by Wednesday in the wake of the U.S.–Iran deal over the weekend.
Investors will get a key U.S. inflation update on the heels of a Federal Reserve meeting that prompted a hawkish market reaction. The personal consumption expenditures (PCE) price index, due on June 25, follows Fed projections that core PCE will end the year at 3.3%, well above the 2% target.
The European Central Bank has taken the first step to contain price pressures, but it is increasingly clear that more needs to be done, Slovak central bank chief and ECB policymaker Peter Kazimir said. The ECB raised interest rates for the first time in nearly three years on Thursday in an effort to curb inflation before a surge in energy costs triggered by the U.S.-Israeli war on Iran spreads more broadly across the euro zone.
European Central Bank policymaker Joachim Nagel said there would be no immediate relief from an energy-driven spike in inflation even if the Strait of Hormuz reopens soon because it will take months for oil supply to recover to its pre-war level. But Nagel reaffirmed his view that all options - meaning both holding interest rates steady or increasing them - remain for the central bank's next policy meeting on July 22 to 23.
The European Central Bank may raise interest rates one more time as soon as next month if it sees more evidence of euro zone inflation spreading beyond energy, ECB policymaker Pierre Wunsch told Reuters, even as the U.S.-Iran deal dents oil prices. The euro zone's central bank may still need to raise rates again if inflation rises in sectors such as services - and even if that move may end up being reversed.
The ECB's Chief Economist Philip Lane told Reuters earlier this week the bank would continue to be "proactive" in its fight against high inflation even after the Iran deal.
He said he had even warned colleagues last week about the risk of an oil glut within a year, potentially pushing crude prices below pre-war levels. He believes, however, that the ECB could go beyond its mantra that it makes decisions “meeting by meeting” depending on the data, saying “at some point it would not mean anything”. Instead he advocated giving conditional guidance.
Financial markets now see between one and two more hikes in the ECB's 2.25% deposit rate, with the next move fully priced in by October. The ECB earlier estimated that the neutral interest rate - the level that neither stimulates nor brakes growth - is between 1.75% and 2.50%, so another hike would put the deposit rate at the top end of estimates.
Meantime, Europe's banking sector could boost lending by more than €2 trillion ($2.2 trillion) if regulators were to simplify rules while maintaining financial resilience, the head of Spanish banking association AEB, Alejandra Kindelan, said on Friday. AEB and fellow associations CECA and UNACC flagged that regulatory complexity and overlapping capital requirements were constraining banks' ability to finance growth. The FT, citing a draft European Commission report, reported on Friday that the EU was set to remove barriers preventing banks from moving funds across the bloc. Europe's banks last week also urged simpler rules to help them finance growth after saying that Europe faced a widening €1.4 trillion ($1.62 trillion) annual investment gap.
Here EU is trying to follow the Fed that mostly denied Basel III Banking capital solvency rules and also steps on the way of easing demands for the banking capital and their reserves with the Fed. Large U.S. banks formally pitched the central bank on tweaks to a regulatory proposal aimed at reducing funds they must set aside to absorb potential losses, as the central bank enters the last leg of a marathon overhaul of U.S. capital rules. U.S. regulators led by the Federal Reserve in March unveiled new relaxed drafts of sweeping capital rules, which they estimated would reduce big banks' loss-absorbing capital by around 4.8%, arguing the current rules are hurting the economy. The so-called 'Basel' rules overhaul how banks measure their risk and in turn how much capital they need.
These processes tells that the EU and the US growth meets serious problems and lack of internal reserves to support it. So, governments and Central Banks start to search any other ways to support it, reducing solvency capital ratios.
LET'S GO FURTHER...
So, inflation in the USA has noticeably accelerated since the start of the "Epic Rage" operation in Iran, but now Trump may hint to Warsh that the rate can still be actively lowered, as an agreement with Iran has been reached and prices for everything will soon plummet as he actually did last week. Clearly, this cunning plan is multifaceted. In general, the market has clearly relaxed - more money was printed, indices have reached new historical highs. But bonds are somehow depressing. Either due to inflation fears, or still due to a shortage of dollar liquidity in the global system. Because futures are one thing, and real deliveries, for which dollars are still needed, are another.
Well, the first press conference of the new Fed head Jerome Powell took place ... we heard the "old good hawk" Warsh [as we remember him 15 years ago]. Markets, of course, are a bit shocked by what they heard ... they are beginning to realize that no one will lead them by the hand to the trough anymore ... the cost of risk - up, markets - down. Warsh:
Forward guidance is no longer, the Fed will only give facts in the press release, not setting the direction. Warsh officially confirmed that the Fed will stop publishing its own expectations for the rate in the updated Dot Plot. He stressed that excessive information (forward guidance) harms the Fed's policy, depriving it of flexibility.
Markets should assess the information and risks themselves, not constantly looking at what the Fed thinks.
Inflation is a choice ... the committee is unambiguously and unanimously committed to this ... this is the main thesis, they said little about the labor market, almost nothing. In fact, this means a shift in favor of achieving the inflation target, here Warsh is definitely more of a "central banker" than the previous three ones. Warsh's approach to reform is generally in his style - he wants to make the Fed adopt the changes itself and developed.
Trump was happy already that they have kept rates intact at least - "it's good that they kept the rates". Because 9 out of 18 officials expect at least one rate hike this year. The Fed lowers its median forecast for US GDP in 2026 from 2.4% to 2.2%. The Fed now believes that consumer spending inflation will not return to the target level of 2% until 2028.
The Fed's final statement was shortened by almost three times - from 341 words to a concise 132. Any hints of a possible easing or rate cut in the future were completely cut out of the text. Instead, the emphasis is on the final phrase: "The Committee will ensure price stability". All new Fed chiefs without exception are met by the market with a fall. The forecast for the rate in 2026 rose from 3.4% to 3.8%, and for 2027 from 3.1% to 3.6%. The forecast for inflation in 2026 was raised from 2.7% to 3.6%, for core inflation from 2.7% to 3.3%, and in 2027 from 2.2% to 2.5%. This means that most expect one rate hike this year... and 6 FED members predict a rate above 4% this year.
Meantime, while all eyes were on Warch and its speech, in the US there are two interesting reports were published. First is, the gap between the US unemployment rate and headline CPI has narrowed to just 0.1 percentage points, the smallest since 2022. This comes as inflation rose to 4.2% in May, the highest since April 2023, while the unemployment rate stood at 4.3% in March, April, and May. Historically, periods when this gap has approached zero have often been followed by Fed rate hikes.
The most recent example includes 2021-2022, when inflation exceeded the unemployment rate for 22 months. This prompted the Fed to hike rates by 5.25 percentage points to 5.5% between March 2022 and July 2023, the highest since 2001. Inflation is back at the center of the Fed's attention.
