AFS Markets Blog: Morning 02/07/2026

• Meanwhile in markets, US Treasury yields are higher still ahead of this afternoon US payrolls figures. And surprisingly, bonds are finding no reprieve despite crude oil futures setting new lows overnight;

• The casus belli for this week’s run higher in US Treasury yields (Bunds are outperforming) could be Treasury Secretary Bessent’s suggestion last Tuesday that US labor market data for June could be solid. That would give the Warsh Fed confidence to raise rates several times to counter elevated inflation without worrying too much about the economy heading south;

• We do see something of a Warsh trade in the sense that US Treasury real yields have risen to the highest level in a year or two. Furthermore, the broad dollar is up close to two percent since Chairman Warsh’s first press conference last month. However, fed rate hike pricing has been comparatively lukewarm. We’re still at just two quarter point hikes priced in. Plus, odds of a July hike are slowly receding, with now just 7bps priced in. At the post-FOMC presser peak, no less than 17bps of hikes were priced in for the July FOMC;

• Warsh, speaking at an ECB panel in Sintra yesterday, had the opportunity to set the record straight yesterday by leaning again heavily on the price stability part of the Fed’s mandate. But instead of rerunning the script of the June presser, when it was price stability above all else, he was more inclined to sell the success story of the AI boom and stronger US trend growth. Of course, I could be overreading Warsh’s remarks.  But then again, he clearly wasn’t engaged in former Fed Chairman Greenspan’s purposeful obfuscation. Warsh did make sense. But it wasn’t hawkish, and a far cry from a performance that would light the fire for a July hike;

• Turning to some market commentary, US Treasury yields are loitering around yesterday’s highs. In the greater scheme of things, US Treasury yields are strongly underperforming Bunds. In the case of the former, yields are up 14-71bps across a bear-flattening curve YTD. And in the case of the latter, YTD yields are up 2-39bps across a bear-flattening curve, with the 30y down a few bps;

• The broad dollar is steady this morning, giving the wounded Japanese yen some reprieve. Just yesterday, USDJPY was approaching the 163 handle before falling back to the mid 162s this morning. Brent crude oil futures have sagged further despite there being little in the way of (positive) news in the US-Iran talks, which are indirect and conducted through mediators once again. Brent is barely holding on to the $70 handle, trading at $70.8 at pixel time;

• In equity space the tech high-flyers of yesterday are still hurting. Over the past five days, SK Hynix, Sandisk, and Micron are down by about fifteen percent. Our very own AI index is down three percent during this period. It’s not all bad in tech space as the Mag7 are up almost eight percent on a five-day basis, with the Nasdaq gaining 1.3 percent. Asian equities are lower this morning, while S&P 500 futures are flattish;

• Elsewhere, ECB doves are on the offensive, with Greek central bank head Stournaras punting for no more rate hikes. ESTRs still price in one final quarter point hike, with a September hike no longer being fully priced in for some time;

• Looking ahead, eyes will be on US labor market data without a shred of a doubt. Payrolls should print at 113k according to Bloomie consensus. Which is clearly above estimates of breakeven payrolls growth, which range from zero to more than 50k. The unemployment rate should hold steady at 4.3%. In any case, such figures will give the Warsh Fed justification to focus on inflation and raise rates at some point. Or perhaps only when Warsh’s much-vaunted task forces are finished.

‍