(Not) What Warsh Wants
The unequivocal focus of yesterday’s trading session was the deluge of data at 13:30 BST from the United States. The data included growth as well as price-level statistics, notably with the inclusion of the Fed’s preferred measure of inflation: Core PCE. Before we dive into yesterday’s data, let’s recap the economic backdrop within which yesterday’s data was introduced.
Freshly anointed Federal Reserve Chairman Kevin Warsh took the controversial decision at the end of July to hold rates. The market had priced in the largest overnight uncertainty to rates since the Greenspan era, with nearly half of the market pricing for an immediate 25-basis point hike. Not only did Warsh disappoint those looking for a hike, but the Chairman also failed to provide any meaningful guidance to the market despite having talked a good game previously with respect to inflation.
The market remains desperate for clarity on how Kevin Warsh’s Federal Reserve will approach the US inflation problem. The next opportunity for that will be Warsh’s speech expected at Jackson Hole on Friday. Yesterday’s data will not have made the prospect of that speech any easier for the incumbent Chairman. Despite Core PCE (just about) coming in in line with estimates, nominal PCE outpaced forecasts by 0.1% month-on-month. That was enough to generate demand in the US Dollar and bolster calls for a hike ahead of September’s heavily divided Federal Reserve decision.
The market yesterday was pricing in around 40% of a hike at the Fed’s September meeting. Real yields moved higher too with hawkish details in the headline readings pushing front-end treasury prices lower. Warsh may well disappoint markets if they do not like the details on how his Federal Reserve will deal with persistent inflation. However, what they would like a whole lot less would be the presentation of an incomplete or incoherent policy picture after waiting so long. The yields investors are demanding to fund the US government amidst policy incoherence and excessive inflation are rising and it’s clear the Treasury is growing intolerant of this paradigm. Once again, the Dollar could be left paying the price of any tantrum in the bond market.
Discussion and Analysis by Charles Porter
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