The Quiet Week That Wasn't

Last week looked quiet on the surface. The major indexes drifted slightly higher, Nvidia posted a blowout quarter, and yet the biggest event of the week had nothing to do with earnings. It happened at Jackson Hole.

Warsh gave his first speech as Fed Chair, and the market took it as hawkish. The two year yield, which moves most closely with Fed policy, jumped 11 basis points that day. Odds of a September rate hike went from about 35% to 60%. Whatever people said afterward, the bond market made up its mind right away.

Three things in the speech stood out. He committed to 2% PCE as the inflation target, which ends the worry that the Fed might simply change the goalposts. He said financial conditions are not restrictive, pointing to tight credit spreads and healthy loan growth. In other words, policy is not yet doing its job. And with unemployment at 4.1%, he said the jobs half of the mandate is met, leaving inflation as the only unfinished task. He also added a sense of urgency, noting that missing the target for 65 months is not timely progress.

We hold two views at once here. The credibility case says he hikes in September, because after talking this tough, doing nothing would cost him his authority. The counter case is that the Treasury has spent months quietly working to keep long term yields down. It intervened in the yen, expanded Treasury buybacks, pushed stablecoin adoption to create new buyers of short term government debt, and is now discussing tapping the Treasury General Account, the government's cash balance at the Fed, currently around a trillion dollars. Spending that cash instead of issuing new bonds means less supply hitting the market and less upward pressure on yields. Nobody in this administration wants long term rates breaking higher into vulnerable midterms.

The rotation underneath is already telling us something. Gold and silver sold off, which should not surprise anyone who remembers gold is a currency and does not like rising short term rates. Meanwhile software has quietly climbed 50% from the April lows while semiconductors have stalled for months.

Our positioning is unchanged. We stay selective, we watch the long end of the curve, and we let price action confirm before we chase anything.