Warsh’s Fed

00:00:00: Hi and welcome to Swisscodes, daily market talk.

00:00:03: It's the eighteenth of June today after Kevin Warsh's first policy announcement as a new fake chair.

00:00:09: that brought a few surprises and surprisingly not necessarily dovish ones on the table.

00:00:15: So US Seals are higher today despite falling oil prices and equities look somehow concerned about the unexpected hockey shift in defense policy.

00:00:24: so we will discuss how the Fed looks under Kevin Warsh, what are challenges for those who watch?

00:00:47: So this week's FOMC meeting didn't really go according to the plan.

00:00:50: As expected, the Fed kept interest rates unchanged and their vote was unanimous.

00:00:55: Price stability emerged as a winning force between the Fed's dual mandate of inflation and maximum employment.

00:01:01: And because U.S is grappling with inflation above four percent thanks to its government decision to poke the Middle East?

00:01:08: Because the latest US jobs figures look somehow improved This month's verdict was clearer than in past meetings.

00:01:14: The dot plot showed that one.

00:01:24: And two, Kevin Walsh refused to add his dot on the dot plot.

00:01:32: He doesn't like the concept of forward guidance manages this balance sheet, uses and relies on the data sources.

00:01:47: And on productivity and jobs.

00:01:49: now scaling back number of comments I think is a good thing because yes we all agree that there are too many of them speaking to much in their too many commands flying in the air and thats making too much noise.

00:02:01: Scaling back the size off the Fed's balance sheet it great idea as well but every investor out there knows very well what would happen if financial markets won't.

00:02:12: post-global financial crisis.

00:02:14: liquidity is pulled back, relying less on DLAT and frequently revised government statistics.

00:02:20: And more on real time market signals such as yields credit spreads commodity prices inflation expectations from tips for example private sector data and productivity trends.

00:02:31: to better gauge where the economy's heading rather than where it has been is a great idea as well, but not willing to put a dot on that dot plot however.

00:02:40: Of course today with the level of unpredictability of US policies It's impossible make any predictions.

00:02:47: at best you build scenarios.

00:02:49: But leaving the market without any forward guidance means that the Fed decisions in the future, will be less predictable by the markets and hence come as a surprise which will undoubtedly inject volatility into financial markets.

00:03:03: because remember The Fed decisions today are somewhat of formality.

00:03:07: The Fed guides the investors toward their decision And In most cases, they're mostly priced at the market where just two details hawkish adjustment, but that's about it.

00:03:19: Now if you shush the Fed members and do away with forward guidance.

00:03:23: The Fed decisions will come as a surprise And monetary policy transmission could be less effective.

00:03:29: So I'm skeptical on that last point.

00:03:31: But all in all, the watch era looks set to be markedly different and potentially far more volatile than the past two decades And i guess we will find out more as we move on.

00:03:41: regarding Will it Be Better or Will It Be Worse for The Markets?

00:03:45: For now, the Fed's hawkish policy announcement on inflation concerns sent a US-two year yield That is known best captured the Fed expectations To the highest levels In almost one half years.

00:03:56: The spread between the US two and ten-year yield fell to lowest levels in a year, an inversion here could mean comic trouble with possible recession module.

00:04:05: An activity on Fed Fund's futures now assesses more than seventy percent chance for October rate hike from the Fed at nearly eighty five per cent chance of December rate hike.

00:04:17: Naturally they thought of hawkish Fed policy and higher interest rates ahead weigh heavily on risk appetite.

00:04:26: sold off yesterday, around one percent after the Fed decision and Magnificent Seven fell nearly three-percent leaving many open tabs in investors' minds.

00:04:35: And of course the sell were tased in Dove's mouth!

00:04:38: The thing is...the decision was so unexpected that one has to wonder whether it wasn't a carefully orchestrated mood to demonstrate Kevin Worsh's independence from the White House or Donald Trump?

00:04:53: After all, everybody knows that Kevin Walsh was appointed by Donald Trump with one clear mission.

00:04:57: to lower the interest rates.

00:04:59: He has been called suck puppet for months, and truly I was very positively surprised yesterday by the changes that Mr.

00:05:07: Walsh is looking to bring to the Fed because i also think that the Fed policy got just too fat over years That the Fed gained too much importance in weight investment decisions And it would be very healthy to cut some of the fat off The balance sheet and let the fundamentals like company fundamentals drive market moves the good old fundamentals like how much money a business makes and how much it spends, stuff like that.

00:05:31: But on the other hand I can't stop thinking this man has still been appointed by Donald Trump First meeting.

00:05:39: So time will tell what's going on, but in the FX markets this hawkish Federal Reserve policy announcement yesterday pushed the US dollar higher against most bagers.

00:05:48: obviously The euro dollars shortly slept below the one fifteen mark the dollar yen push higher above the One hundred and sixty level and cable took a toe below the One point.

00:05:58: thirty three mark today the Bank of England is expected to maintain its interest rates unchanged thanks to relatively soft inflation data recently suggesting that price pressures in the United Kingdom did not necessarily rise further or they didn't rise as much as feared.

00:06:16: Maybe the high competition among UK retailers help tempering price pressures.

00:06:20: Or maybe people who already deal with a restrictive fiscal policy could on stomach higher prices, but The Bank of England knows that time is ticking louder toward vision for the energy price cap this July which will make inflation figures in the U.K look different than they are today and lot more in favor rate hike.

00:06:39: The good news is oil prices keep pulling lower this week into schedule signing between US and Iran This Friday, and maybe it's Thursday as said by Donald Trump.

00:06:49: U.S.

00:06:50: credit is trading below the seventy-five dollar per barrel level this morning at a time I'm talking here despite Israel's refusal to end war in Lebanon.

00:06:58: but bad news that the latest European central bank unfit decisions clearly show policy makers in Europe do not rely on the idea lower oil prices will immediately cool down inflationary pressures.

00:07:13: so for the markets monetary policy tightening from the major central banks and higher yields across the globe are not supportive of market valuations.

00:07:23: And inside the markets, The Big Technology came out unbrews from the latest monetary policy-tightening period thanks to the nascent AI and ample free cash that these companies had in their hands to navigate through a higher interest rates.

00:07:36: but today the big technology companies taking on debt to finance to rising borrowing costs than the latest tightening cycle.

00:07:47: Last but not least, investors seem little concerned by the rise in borrowing cost.

00:07:52: at current valuations and aimed at the rising bubble concerns among big technology companies some investors are preferring to rotate towards bond markets.

00:08:02: this week NVIDIA successfully made a market absorb of twenty five billion US dollar worth with bond issuance that was higher then twenty billion US dollars.

00:08:10: their first concert group And more broadly, big technology has become one of the largest borrowers in corporate debt markets issuing roughly US dollar bonds and already more than US dollar so far this year to fund AI build out.

00:08:26: Is it a good thing?

00:08:27: On one hand demand for Big Technology Bonds confirms that investors remain willing to finance massive AI build-out but on other hand higher debt highlights growing dependence off sector interest rates and future revenue growth to justify an increasingly debt-funded investment cycle.

00:08:45: So my conclusion is, the AI revenue had better grow fast to keep this castle intact!

00:08:59: This episode of Market Talk has been helpful and it's been insightful to you, so please do not hesitate to leave your comments, reactions or questions below as usual.

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00:09:27: So I will meet you again tomorrow.

00:09:31: And until then, good day

00:09:49: trading!