AFS Markets Blog: Midday 16/09/2026

• Meanwhile in markets, Fed Chairman Warsh’s biggest problem isn’t that he boxed himself in by guiding for a rate hike tonight. The problem is that Warsh has let markets run wild further up the curve;

• Almost in the blink of an eye, OIS and futures have priced in a full-blown mid- or late cycle (business cycle) rate hike cycle of close to a hundred basis points. If forward pricing is realized, that would put the federal funds rate at 4.63 percent. That’s more than a percentage point and a half above the FOMC’s estimate of the neutral rate. In plain English: a strongly restrictive policy stance;

• If forwards are realized, we will likely end up with an inverted yield curve again. Historically, for every quarter point rate hike the Fed realizes the 2y10y Treasury yield spread narrows by roughly half the rate hike increment. I clock the 2y10y spread at 35bp. So, after three hikes we’d be back in inversion territory. And the recession narrative will inevitably rear its ugly head.  For Warsh, who says there is a false choice between price stability and inflation, that’s certainly not the desired outcome. We know all too well about Warsh raging against inflation. But he’s also (somewhat) of a believer in the AI productivity boom. He doesn’t want to be the archetypical Fed Chair whose over-tightening produces a recession;

• Bottom line: I think we’ll get a dovish hike tonight. Not in the sense that Warsh will make the same mistake of painting himself into a corner by giving lukewarm signals about follow-up hikes (he will leave the outcome of future meetings wide open). No, instead, the tone of the press conference will be calm, neutral, and business-like. No more raging against inflation. Perhaps we might even see some dovish dissent from Governor Waller's contingent. If I am right, we will see a bit of a pull-back in yields tonight, especially on the short end;

• Turning to some market commentary, around noon US Treasury yields are basically motionless at levels a whiff below their recent multi-year slash multi-decade highs. European equities are up, as are S&P 500 futures. Gains are modest though, with the Stoxx 50 up 0.2%. That puts the index five percent below the August high, when energy futures prices were substantially lower, and when ESTRs hadn’t priced in more than 125bps ECB rate hikes (we were more at 50bps if memory serves me well);

• And speaking of energy futures, Brent crude at $107.8 a barrel is a buck or so below its recent high. Dutch natural gas futures at 80.95 euros per MWh are 3.6% below the high of the week, which in turn was the highest level since the 2022 energy crisis (remember that one). In any case, notice the nearly complete lack of US-Iran tit-for-tat strikes in the past week and a half involving either shipping in the Strait of Hormuz or the Gulf nations. That hasn’t helped much in bringing about lower energy prices though for obvious reasons: the Yemeni Houthis’ campaign;

• Looking ahead, besides the Fed keep an eye on US retail sales out at 14:30 CET. Consensus expects a relatively solid 0.4% gain in sales excluding autos and gas.

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