• Meanwhile in markets, what is Fed Chairman Warsh’s play going to be when he gives his first press conference tomorrow? I see three scenarios, with markets – perhaps correctly – having priced in the path of the least resistance. That is: Warsh paying lip service to the Fed’s inflation mandate but unfortunately not moving the dial compared to his predecessor;

• The lip service part refers to obviously restating the two percent target. And removing the dovish bias from the April FOMC statement, which was former Chairman Powell’s parting shot. But restating the target and tweaking the statements are easy wins. They require no skin in the game;

• Fed funds futures and OIS are priced to perfection. But at the same time, pricing is completely wrong when you think about it. One 25bps hike is fully priced in. Which is bang in line with the output of my simple Taylor rule with high inertia (inertia is a factor for giving greater weight to past interest rate decisions). While that rate hike might look great on paper (re the Taylor rule), it makes zero sense. When was the last time the Fed pulled a ‘one and done’ hike? Decades ago. More importantly, inflation has been above target every year since 2021. Core has blasted to north of three percent this year. What good is one quarter point hike going to do? Now remember, Warsh sold himself as the guy who is going to change the Fed;

• Yes, Warsh will likely do some housecleaning. He hates the ‘dot plot’ (FOMC forecasts) and could simply drop them. Then again, how does dropping the dot plot square with his preference for forecasts over data when setting policy? He could cut the number of press conferences to four from eight. He might say that he will communicate less and stop doing the central banker ritual that is offering forward guidance. That’s taking a leaf out of the ECB’s playbook. Remember: Lagarde & Co are resolutely sticking to the line that “rates are not on a preset path.” But how has the ‘no forward guidance, forward guidance’ method worked out for the ECB? As an ECB-watcher, I can tell you that ECB-speakers can’t help themselves. They speak incessantly. And they leak to the press with almost equal vigor;

• Then there is Warsh’s smaller balance sheet fetishism. He wants a smaller balance sheet, but I fail to see how he will get there except when he accepts much greater money market volatility and run the risk of money market seizures;

• Warsh could walk the above path of cosmetical, non-meaningful changes. Other options would be: Trump’s stooge. Or a hawkish surprise. The former is straightforward. He cherry-picks the most benign measure of underlying inflation (trimmed mean) and steers the ship towards a rate cut later this year. Just in time for the November elections. In the case of a hawkish surprise, he will heap blame on Powell (who is sitting at the same table) for losing sight of the inflation target. The message being that he’s priming markets for a string of hikes;

• So, to conclude with markets, if Warsh turns out to be mellow – the market scenario – the single rate hike that is priced in won’t be realized. In a way, pricing probably reflects the risk that Warsh could turn out to be a hawk after all, and not a dove;

• Turning to some market commentary, with Iran starting to play second fiddle for markets, I detect a rather lukewarm response in US Treasuries to this morning’s decline in crude oil futures prices. Earlier in the session, Brent crude futures fell four percent to $81.03, the lowest level since March 4. But UST yields are only several bps lower. European equities are in the green, with the Stoxx 50 up nearly a percent and exceeding the pre-war high. US equity futures are flattish though;

• Bunds have rallied in the wake of last week’s ECB meeting and the Iran deal. Markets had mispriced a third quarter point ECB hike, which is now mostly priced out. Still, 10y and 30y Bund yields are facing stiff resistance around current levels (2.93 and 3.50, respectively), which happen to be the 100-DMAs;

• Looking ahead, today’s calendar is quite simply empty. Focus will be on tomorrow's FOMC, as well as US retail sales data.

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