• Meanwhile in markets, Fed Chairman Warsh has revived the policy mistake trade. Following his unexpectedly hawkish performance at his first press conference on Wednesday, 2y10y Treasury yield spreads have fallen like the proverbial rock;

• At just 27bps, that spread is only a bp or so above the post-FOMC lows. And about 15bps lower than where we started the week. Now, if memory serves me well, typically, the spread narrows by roughly half the increase of the federal funds rate. So, the market gives Chairman Warsh leeway of about two hikes before we invert. And that’s assuming that there are no negative shocks that flatten the curve without Warsh & Co lifting a finger (on the other hand, the curve can also steepen for various reasons);

• If Warsh really is an inflation hawk – two percent inflation über alles – the famous rule about the Fed and the cause of US recessions will apply. As the famous MIT economist Rüdiger Dornbusch quipped: “no postwar recovery has died in bed of old age—the Federal Reserve has murdered every one of them.” The reason former Chairman Powell’s rate hike cycle didn’t end in tears wasn’t just because he cut rates just in time. He allowed inflation to drift above the two percent target and let it stay there. Powell sacrificed price stability for saving the economy.  If Warsh is different and willing to achieve price stability, you can’t make an omelet without breaking the egg. The economy will suffer;

• Post-FOMC, the market is still pricing in two 25bps rate hikes, with the forward curve peaking nine months out. Markets are leaning more and more towards my call, namely that Warsh will start raising rates as soon as next month. August fed funds futures imply 10bps of hikes. Which brings the odds closer to a coin toss of a hold and a hike;

• The hawkish Fed has provided a tail wind for the dollar, with the broad greenback up a phat one percent or so on a weekly basis. More importantly, the hawkish Warsh has trumped the Iran war deal and lower oil prices, which would have normally sent the broad dollar lower;

• Turning to FX, amongst the majors the Swiss franc, sterling, and the euro are the biggest losers versus the greenback. And there isn’t any reprieve for the already hard-hit yen either. We’ve blasted through the 161 handle, a point above Japanese FX officials’ line in the sand that was 160. Overnight, a Bank of Japan speaker sounded hawkish, perhaps in response to yen weakness. Deputy Governor  Himino warned that inflation could accelerate beyond the two percent target as higher energy prices are already being passed through to broader prices. In this regard, it’s worth pointing out that Japan’s apparently benign inflation figures are the result of government subsidies intend to lower prices. According to the overnight data release, core rose by a leisurely 1.4 percent last month. Which, it must be emphasized, gives us a false sense of comfort. And for the record: BOJ-dated TONARs price in only one quarter point hike plus a few bp – nothing more;

• Brent crude oil futures have (dead cat) rebounded from the lows and are trading only a whiff below the $80 handle. According to the latest in the Iran saga, Vice President Vance has delayed his trip to Switzerland, where he was expected to physically sign the MOU with the Iranians today. Apparently, Vance will travel to Switzerland at some point, but technical talks on the nuclear issue should start first;

• Equities are recording solid gains for the week, ranging from more than two percent for the Stoxx 50 and Nasdaq to no less than seven percent for the Nikkei. The S&P 500 is lagging with a one percent weekly gain. What matters for us Europeans is that the Stoxx 50 is almost two percent above the pre-war high. Happy days are here again;

• In other news, Russia has vowed “massive” retaliation for Ukraine’s very successful drone strike on energy infrastructure near Moscow this week. Keep an eye on stocks like RBI, which is an (in)famous peace trade play, given the bank’s large exposure to Russia;

• UK political junkies can eat their heart out after Greater Manchester mayor Burnham won a special by-election, allowing him to challenge the hapless PM Starmer for leadership of the party and the country. Burnham is to the left of Starmer, though that hasn’t resulted in a stampede out of Gilts. YTD performance of Gilts is in line with that of Treasuries, much better than that of JGBs, but worse than Bunds;

• Looking ahead, expect quiet trading as US markets are closed for a holiday. On the calendar we find a couple of ECB-speakers and that’s it. Next week’s calendar is uneventful, with the usual smattering of central bank speakers and mostly second-tier economic data except the PMIs.

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