Despite market-friendly Middle East developments, investors yesterday were solely focused on the Federal Reserve board meeting, which they interpreted in a not-market-friendly way.
For me, the increasingly hawkish (inflation-fighting) sentiment among the members was no big surprise, but Warsh not effectively walking that back during the press conference was.
Now, saying that he'll be an aggressive inflation-fighting-via-higher-rates voice on the Fed is not my base case, given the dynamics I spelled out in yesterday's note... Specifically:
"Today with debt to GDP of close to 130%, the Fed is almost completely handcuffed. They can raise rates a bit, but no way they can push borrowing costs up substantially with so much government debt coming due over the next two years.
And that’s the big challenge, and that’s what Warsh is there for. Keep the short end of the curve suppressed so the treasury can refinance into T bills at very low rates for the time being. Also, the government is running a 6% budget deficit which has to be financed, you can’t have high rates.
So there is gonna be some real manipulation of the yield curve, which will happen by the Fed printing money and buying T bills as they’re issued, to the extent that nobody else will. That’ll keep the bid high and the yield low."
As I type, the focus has shifted back to the Middle East... Yesterday's signing of the "memorandum of understanding" has stocks catching a bid... Which is consistent with our near-term thesis.
I'll be away this weekend, so look for the usual macro wrap early next week.
In the meantime, here's your morning roundup*:
A Steadier Tape, and a Fed That Won't Tip Its Hand*
After a sharp wobble midweek, the market found its footing this morning, with the major indexes broadly higher.
The catalyst for the week's volatility was the Federal Reserve's meeting — the first under its new Chair. While the central bank left interest rates unchanged, as nearly everyone expected, its updated projections struck a more cautious tone on inflation than markets had been positioned for, and stocks initially pulled back as investors recalibrated. Just as notable was a clear shift in communication style: the new Chair has signaled he intends to offer markets less explicit guidance about the path ahead, preferring to keep the central bank's options open rather than pre-commit. In the short run, less hand-holding tends to introduce volatility, particularly for the longer-horizon growth stocks whose valuations are most sensitive to interest-rate expectations. Over a longer horizon, we read the same posture differently — a Fed that declines to box itself in fits our broader view of where policy is ultimately headed.
On the geopolitical front, the interim agreement aimed at easing tensions in the Middle East was formally signed this week, and energy prices have continued to drift lower as a result. We'd offer one note of discipline here: a signed agreement and a fully reopened shipping lane are not the same thing. The diplomatic milestone is real, but the physical movement of goods through the region's critical waterway has not yet normalized in the data — and until it does, we're inclined to treat the de-escalation as promising rather than settled. With markets closed tomorrow for the Juneteenth holiday and a quieter stretch ahead before month-end economic readings arrive, we'll be watching that gap between announcement and reality closely.
This note is for informational purposes and is not a solicitation to buy or sell any security. Past performance is not indicative of future results.
*Prepared by Marty Mazorra, Chief Investment Officer, Private Wealth Advisors. Research synthesis and drafting assisted by AI tools under advisor review. All market views, analysis, and recommendations are those of the advisor.
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