AFS Markets Blog: Morning 14/09/2026

• Meanwhile in markets, be careful what you wish for. Fed Chairman Warsh at the July FOMC presser politely asked markets what they think he should do. And almost in the blink of an eye, we’re moving towards pricing in a full-blown rate hike cycle;
• USD OIS are now pricing in more than 80bps of hikes. That’s up roughly 50bps from pre-Jackson Hole levels, when Warsh primed punters for a hike in September contingent on the August CPI release. A September quarter point hike is now fully priced in, as is another quarter point hike in December. Warsh, who has said many times that he does not like forward guidance, has clearly boxed himself in. He must deliver on Wednesday or else give up what little credibility he has built up with his repeated promises to restore price stability after five straight years of above target inflation;
• Predictably, President Trump has weighed in on Wednesday’s FOMC meeting. His remarks that the US should have the lowest interest rates in the world because the US is so “strong” couldn’t be more Trumpian. However, I think Trump’s Fed comments are kind of soft. He was much nastier with former Chairman Powell, who he quite literally hounded;
• So, when the Fed raises rates on Wednesday in all likelihood, Trump will probably weigh in. However, the real test for any Fed Chairman is not an annoyed or angry President (which is bad enough), but an equity market crash. So far, US equities have been remarkably resilient. While European equities are headed towards correction territory, both the S&P 500 and the Nasdaq remain remarkably close to their all-time highs;
• As any Fed watcher can tell, for the Fed the equity market is the signal while the bond market is the noise. It should be the other way around. US Treasury yields across the curve are at their highest level in years, if not decades. Same for Treasury real yields. Warsh will see this picture as telling him that the market has already done the Fed’s job of tightening financial conditions. If that was the case, the economy should (start to) slow, and the equity market should falter. And perhaps correct;
• Given trend nominal US GDP growth of around five percent, 10y and 30y yields are not particularly high. But when taking the federal deficit into account, yields are at painfully high levels. Still, I wonder how much more long end yields can rise. If they rise more on the back of further energy price increases (which seems likely) and another bout of hawkish Fed repricing, the R word for recession comes to mind. Then I’d be looking at catching that falling knife: long end bonds;
• Turning to some overnight market commentary, Brent crude futures prices are up nearly three percent at $107.33 a barrel. Dutch natural gas futures are up no less than five percent this morning, reaching an Iran war high of more than 83 euros per MWh. Energy prices are up on reports that a key Saudi crude pipeline that the kingdom uses to bypass Hormuz has been disabled after an attack. Recall that the Saudis were already having a hard time as the Yemeni Houthis (an Iranian proxy group) have conquered the coast along the key Bab al-Mandeb strait. Furthermore, according to separate reports a meeting today between Iran and Gulf nations in Oman on partially reopening the Strait has been postponed until further notice. Unsurprisingly, US Energy Secretary Wright is on the wires saying that the only ships that will transit the Strait are the few vessels that the US navy shepherds reportedly through the Strait every (other) day;
• Predictably, energy prices are dragging UST and Eurozone govvie yields higher. OATs hurt the most. The 10y spread with Bunds reached a post-Eurozone crisis high of 95bps this morning. Blame the rise in the polls of far-left firebrand Presidential candidate Melenchon for the underperformance of OATs. Melenchon, who might end up in the run-off round against Le Pen in the elections next year, has called for France to default on its bond held by the ECB. Asian equities are mixed, with the Nikkei down a percent and the Kospi shedding three percent while Chinese markets are up marginally. FX is a quiet affair, with the broad dollar up marginally and USDJPY moving little compared to the carnage of the past weeks;
• Looking ahead, all eyes will be on Wednesday’s FOMC meeting. Other key events this week include US retail sales on Wednesday, a smattering of ECB-speakers hitting the wires almost every day, and the Bank of Japan meeting on Friday, where consensus also expects a quarter point hike.