• Meanwhile in markets, US Treasuries and rates and the dollar are still under the influence of the Warsh trade. The equity market isn’t testing our new Fed Chairman yet – Micron’s blowout earnings have provided reprieve for the overheated corners of the market (everything AI related);

• Real USD yields have blasted higher on the back of oil prices quite literally taking the plunge. Nominal yields are also substantially lower because of the Iran deal, but they haven’t managed to maintain pace with breakevens and inflation-linked swap rates;

• Fed rate hike pricing has remained firmly fixed on two quarter point hikes in the next nine months because of Warsh’s hawkish inclinations at this first FOMC press conference. At the same time, short(er) term market-based measures of inflation expectations have shown the strongest declines because of the aforementioned declines in oil prices. As a result, I clock the 2-year real yield at a two-year high or thereabout of 1.85 percent. The 1-year SOFR real has blasted higher in similar fashion. It’s the violence of these moves at the short end that are really weighing on the prices of gold and its digital equivalent, bitcoin. Both are deep into bear market territory, with Bitcoin, of course, underperforming the barbarous relic. Now, does anyone still remember last year’s investment fad that was the ‘debasement trade’ (which the bond market never bought into)?;

• Earlier in the morning, the nearest-dated Brent crude oil future reached a new post-war low of $72.06 a barrel. Since the oil price decline is much faster than our central bank overlords in Frankfurt had expected, and since I am pretty optimistic that the deal with Iran will hold, ECB staff will be cutting/gutting their inflation forecasts when they do the exercise again in September;

• ESTR swaps have duly responded to the writing on the wall that are substantially lower oil prices. A September 25bps hike is only partially priced in – just 17bps to be precise. Furthermore, odds of a third hike have receded further – and fittingly so. The peak of the forward curve at 2.49 suggests only a handful of bps are priced in for a third hike;

• ECB Board Member Schnabel, who was at the forefront of the push for a June rate hike, suddenly found herself fighting a rearguard action for additional hikes. In a rather blunt interview – granted, with a German newspaper – she said that the ECB must continue to raise interest rates – ceasefire or not. With the doves having a tailwind in the form of lower oil prices, I expect to see some pushback against a second hike in the weeks ahead;

• I want to emphasize that while the risks to my forecast of a second hike in September are to the downside (risks of a hold), don’t underestimate the ECB’s appetite for destruction. They can hike just for the hell of it. They did so in 2008, 2011, and unnecessarily did a final 25bps in September 2023 because a four percent deposit rate was just such a nice round number;

• Let us not forget about the equity market punters, who have taken heart from Micron’s blowout earnings and outlook. Nasdaq futures are three percent off the lows, though still below the highs by about the same percentage amount. Furthermore, despite all the fanfare about Micron, European equity markets aren’t moving much. I clock the Stoxx 50 barely half a percent higher, which pales in comparison to Asian equity market gains this morning, such as almost five percent for the Nikkei and more than five percent for the Kospi;

• In FX space, the dollar is flat for the day, thereby consolidating its post-Warsh gains of about two percent. There’s no reprieve for USDJPY, which is now approaching the 162 handle – for what it’s worth;

• Looking ahead, the calendar is not very exciting with just US economic data (including PCE inflation) and a bit of central bank speak to look forward to.

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