AFS Markets Blog: Morning 30/07/2026

• Meanwhile in markets, weak, weak, weak. There’s no other way to describe Fed Chairman Warsh’s performance last eve than as a massive disappointment. A golden opportunity to hike. But instead, a hold and only spin about how he really (really!) will bring down inflation. President Trump praising Warsh afterward as a “fantastic” Chairman tells you all you need to know;

• Even if Warsh couldn’t have persuaded the majority by joining the three hawkish dissenters who favored a hike, during the press conferences (which we now learned he loathes and wants to abolish next year), he had all the opportunity to burnish hawkish credentials. What he did was the exact opposite;

• Channeling the Fed’s worst Chairman, 1970s Arthur Burns, Warsh suggested that other tools besides the overnight rate could be used to quell inflation. That’s a pristine excuse for wanting but not really trying to get inflation down. Adding insult to injury and repeating his line from his nomination testimony, he opined again that the Fed could look at other price measures beyond the PCE measure, the current target. Warsh hit rock-bottom when he implied that the market has done some of the Fed’s job of tightening financial conditions. The implication being that the Fed can sit on its hands for longer. Obviously, Warsh hasn’t remembered Milton Friedman’s lesson that higher interest rates signal easier, not tighter financial conditions. In this case: higher rates embed higher inflation expectations. Or inflation uncertainty if you will. Furthermore, high and rising rates suggest that the demand for credit is outstripping supply, leading to higher prices – interest rates;

• Warsh styles himself as Greenspan reincarnate. He seems to believe that he can let the AI boom run and run so that the economy can reap the (hopefully) disinflationary productivity boost later. Similar to Greenspan leaning back on rates in the face of the all-mighty 1990s tech boom. But the difference between Greenspan and Warsh is that the former had already brought down inflation to two percent. These days, PCE core is tracking north of three percent. Greenspan, glancing at tech stocks, warned of irrational exuberance. Warsh will do no such thing;

• Yours truly had expected that Warsh would not follow through at yesterday’s FOMC meeting even though, given his tirades against inflation, he had all the reasons to make a move and leave his mark. But, true indeed, the tide was against him. Ahead of the meeting, the two other members of the Fed triumvirate, Vice Chairman Jefferson and New York Fed President Williams, were in no hurry to lift even a finger. Governor Waller was hiding behind the soft June CPI/PPI readings to support a hold. One wonders what Warsh’s shadow, Governor Powell, is thinking;

• So, what’s next for Warsh & Co? They’re banking on inflation easing further in the months ahead. I am not so sure. While we’re not yet doing official Fed forecasts, if asked at gunpoint, I would say count on 25bps hike in September. Furthermore, if Warsh stays in all talk no walking the walk mode, that should steepen the yield curve even further. With particularly disastrous consequences for the 30y;

• Turning to some market commentary, long end UST yields are still up by about 10bps in the wake of the disappointing FOMC meeting. At 4.70 for the 10y and 5.23 for the 30y, that puts as at or nearly at the highest level in three years for the former and twenty (twenty!) in the case of the latter. Real yields are down as increases in market-based measures of inflation expectations outpaced nominal yield increases;

• A September rate hike is no longer fully priced in – gasp. October fed funds futures suggest 17bps of hikes. As per November futures, a hike for October is fully priced in. However, I fail to see how the Fed would not move in September and then hike on the eve of the midterm elections;

• S&P 500 futures are down but off the lows, with some punters attributing the weakness to Warsh. That’s overdoing it. Asian equities are lower, but with the Korean Kospi shedding just a percent, that’s basically unchanged for our increasingly volatile markets. Samsung and SK Hynix are down moderately (-2% and -5.7%, respectively) on the Korean bourse;

• Neither Bitcoin nor gold has profited from Warsh’s Trump-pleasing performance. Bitcoin is flat while the barbarous relic is down a percent for the day. Brent crude oil futures have rebounded to the $90 handle in the wake of US retaliatory airstrikes on Iranian targets overnight. The broad dollar is mixed; down versus the majors, flat versus EM currencies;

• Japanese government bond yields are up several bps for the longer tenors after PM Takaichi has decided to cut the sales tax on food and soft drinks to 1% from April next year. With the ‘aim’ of restoring the original 8% rate after two years. With the government downgrading its growth assessment at the same time, the obvious outcome is more fiscal slippage;

• Looking ahead, the calendar is chockful of Eurozone economic data plus the Bank of England meeting this afternoon, which should be a hold. Also on tap is the Fed’s preferred inflation gauge, the PCE price index, which should confirm the inflation lull in June.

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