Indexes up, market down, hawks out – Warsh on deck

Well, the indexes went up, but not so much for stocks…. You see – the Dow added 105 pts, the S&P gained 55 pts, the Nasdaq added 411 pts, the Russell added 9 pts, the Transports lost 142 pts, the Equal Weight S&P lost 26 pts while the Mag 7 surged – gaining 520 pts…. So, it doesn’t sound so bad, right? Well, look again and pull back the sheets.

Yes the AI trade is alive and well – tech had a good day – NVDA up 8.7% or $19/sh, Semi’s up 2%, Cybersecurity exploded higher – rising by 7.6% (see my piece from yesterday), CRWD up 20.5% or $39/sh and OKTA up 28% or $38/sh both mostly responsible for the surge in Cyber…..better earnings, better guidance – blah, blah, blah….Disruptive Tech up 1.9%, the Growth Trade up 1.5%, the Proshares Triple levered QQQ (TQQQ) jumped by 4%, Software shot higher up 7%, - CRM gaining 22% in one sweep, Memory stocks up 0.8% and Quantum as a group was up 1.8% but individual names – QBTS + 2%, QUBT +3.5% & IONQ + 6%.

So yes — if you owned the right names, it was a great day.

But if you own the market? Different story.

Pull back the sheets and what do you see? A whole lotta of RED….10 of the 11 S&P sectors ended the day lower –Consumer Staples down 1.4%, Healthcare down 1.2%, Communications and Consumer Discretionary lost 1+%, Industrials -0.8%, Utilities – 0.7%, Financials -0.7%, Energy – 0.3%, Basic Materials – 0.8% and Real Estate – 0.9%.

Now, you understand why the Equal Weight S&P was negative while the Cap Weighted S&P was positive…. This was not a broad market rally. This was a mega-cap tech/AI rally that was powerful enough to drag the indexes UP while most of the market went DOWN.

And that distinction matters - because if you only looked at the closing bell and saw the S&P up 55 and the Nasdaq up 411, you would have completely missed what actually happened underneath the hood.

Ok – so what happened?

Beth Hammack & Jeffrey Schmid is what happened. And that caused the bond market to stand up and listen…. And what did it hear???

Beth wasted no time as she pulled into the Jackson Lake Lodge and said – Enough Already! Cleveland Fed President Beth Hammack isn’t dancing around the issue anymore. She thinks rates should go UP and said inflation has been above the Fed’s 2% target for more than five years, so “now is the time to act.”

She went even further, arguing that when she looks at financial conditions, she doesn’t see much evidence that current monetary policy is particularly restrictive.

And remember – this isn’t some new position. Hammack has been a hawk for a while and is one of the three that dissented at the July FOMC meeting – voting for a 25-bps hike rather than falling in line and voting to do nothing.

Recall – we started the year with -When does the Fed cut? Then it became - Maybe the Fed doesn’t cut. And now it is -Will the Fed HIKE?

And not to be outdone – Kansas City Fed President Jeff Schmid piled on – saying inflation remains “stubborn” and “sticky” and questioning whether the current 3.50%–3.75% fed funds rate is restrictive at all.

His point was essentially – if the economy is still growing, companies are still borrowing, markets are near record highs and inflation remains above target – what exactly are we restricting?

Ok Jeff, here’s the point – the Fed controls the overnight rate and heavily influences the short end of the curve, but it doesn’t control the 10-yr. The MARKET does that – and lately the market itself has become more restrictive.

Boston Fed President Susan Collins was less aggressive, saying she still sees policy as mildly restrictive – but the message coming out of Jackson Hole is becoming clearer - The Fed is divided, inflation remains the problem and the bar for easing monetary policy is getting higher – not lower.

And remember – Warsh wants markets to play a larger role in determining interest rates. Well guess what? The bond market is talking.

The 10-yr yield is up 18% from its March 2nd low – that’s nearly six months of higher yields. This morning it’s yielding 4.67%. The 30-yr is up 13% from its March low and is yielding 5.2%.

Yes, both are down a bit from their most recent highs – and you can probably credit Scotty and all his jawboning for some of that as Treasury threatens to buy more of the long end in an effort to bring those rates down.

But the bond market will not allow itself to be artificially repriced forever. Investors will demand whatever yield they believe compensates them for inflation, fiscal risk and the tidal wave of Treasury issuance that’s coming. PERIOD.

And here’s where it gets interesting – because now we have a policy tug-of-war developing.

On one side, Hammack and Schmid are essentially arguing that financial conditions may NOT be restrictive enough to get inflation back to 2%.

On the other side, Scotty and the Treasury are trying to push long-term borrowing costs DOWN.

See the tension?

If Hammack and Schmid are right, then pushing long-term yields lower actually works in the opposite direction. Lower long-term rates mean cheaper mortgages, cheaper corporate borrowing, cheaper capital and ultimately EASIER financial conditions.

So, some Fed officials are talking about becoming MORE restrictive while Scotty is trying to ease some of that pressure at the long end – essentially becoming LESS restrictive.

And now Kevy walks right into the middle of it. And everybody wants to know – What does Kevin think? What will he say?

To which I might reply – “Only your hairdresser knows for sure!” (That’s for all the Boomers out there!)

Now – if you think he’s coming out at Jackson Hole to resolve this policy tug-of-war, I’d say, “not so fast.” And if you think he’s going to challenge Treasury Secretary Bessent’s latest moves, I’d say “you’re out of your mind” – that’s a no-win situation.

I mean, do you really expect him to use Jackson Hole as a bully pulpit to PRE-ANNOUNCE a September rate hike or publicly challenge Bessent?

Really??? That’s NOT happening.

Warsh has made it clear that “less is more.” He isn’t a fan of forward guidance and believes FOMC members should essentially stay out of the media and stay quiet. He made it clear during his nomination process that he thinks central bankers have spent WAY too much time telling markets exactly what they’re going to do.

So, I’m not expecting some dramatic policy announcement. But I will be listening to his tone.

Does he acknowledge that inflation remains too high? Does he agree with Hammack and Schmid that policy may not be restrictive enough? Does he talk about the balance sheet? And does he say anything – anything at all – about what’s happening at the long end of the curve?

Because today’s speech may ultimately be more important for the BOND market, the DOLLAR and GOLD than it is for stocks – because those three markets should give us the clearest read on how investors interpret Warsh’s commitment to inflation and the Fed’s inflation-fighting credibility.

And THAT is what I’ll be watching at 10 am.

And of course, no one is going to forget oil…..and just when you thought it was all good – here we go again….

WTI surged $1.30, or 1.6%, to settle at $83.53, while Brent jumped $1.86, or 2.1%, to $89.70. So, those hopes for some grand diplomatic breakthrough with Iran took another hit. What did I tell you yesterday?

Trump told mediators that he has no interest in returning to the terms of the June agreement with Iran, complicating the diplomatic effort by Qatar and others to restart negotiations. He even said that he is not interested in meeting with whoever is in charge while at the same time imposing another round of sanctions designed to tighten the screws on Tehran even more.

So, there you go…. oil traders put the geopolitical risk premium right back into the price of oil and that will put pressure on the chain….

Higher oil = higher transportation costs = higher input costs = higher inflation expectations = pressure on Treasury yields = pressure on the Fed.

Which is exactly why Beth & Jeff’s comments mattered yesterday.

Gold gained $11.50, or 0.25%, to settle at $4,600, snapping a two-day losing streak. My sense is that gold remains concerned about inflation, geopolitical instability and concerns over government debt.

That’s important. Because historically, when investors got nervous, one of the first places they ran was US treasuries. And while treasuries remain a safe-haven asset, long-duration treasuries (10+ yrs) are now part of the conversation as investors demand greater compensation for inflation risk and fiscal uncertainty.

And when investors demand greater compensation to own long-duration debt, yields RISE and bond prices FALL. Econ 101.

Which helps explain why gold continues to have a bid. Trendline support is now $4525 while short-term resistance remains at $4,700. This morning gold is trading up $5 at $4,605.

So, here’s where we are. Stocks remain near record highs. AI earnings remain strong. Corporate America continues to make money. The labor market remains firm – initial jobless claims actually fell to 203,000 last week – giving the Fed even less reason to rush toward easier policy.

But inflation remains sticky. Oil is back in the mid 80’s, treasury yields remain elevated. The federal deficit is NOT disappearing. And now Fed officials are openly discussing higher rates.

That doesn’t mean you sell everything and run for the hills. It means you remain disciplined. It means you don’t chase stocks because Nvidia went up 8%. It means you maintain exposure to quality names across the spectrum – including but not limited to technology and the AI infrastructure. It means owning financials, industrials, energy, healthcare, consumer staples and other quality names that provide balance.

Because yesterday the cap weighted S&P went up – but most of the market didn’t. The AI trade can be alive and well while the bond market remains concerned. Both things can be true. And right now – they are.

Today belongs to Kevin Warsh. The issue is whether he’s going to tell investors something they may not want to hear - Inflation isn’t dead, the Fed isn’t done – and higher-for-longer may actually mean higher.

Boom. Welcome to Friday!

This morning – European markets are up…. France in the lead – up 1% with Italy close behind up 0.9%. The UK is the laggard only ahead by 0.2%.

US futures are confused - Dow futures are up 66 pts, S&Ps are down 2, Nasdaq is down 90 while the Russell is flat.

The S&P closed at 7,730 – up 55 pts…. And yes, Kevin IS giving a speech, so obviously he has to say something – I’m just not convinced he’s going to say what everyone THINKS he’s going to say.

Sit tight – 10 am is only hours away.

And remember – whatever he says, he says, and markets will either react or they won’t. But here’s the other thing to keep in mind: this is the final Friday in August.

Volumes are LOW. Desks are empty. People are squeezing in that last summer weekend before Labor Day – which means whatever reaction we get could be dominated by traders and the algo’s.

And in a thin market, moves can get exaggerated very quickly.

So, if Kevin says something that catches the market off guard and stocks suddenly surge or plunge or yields spike or collapse – don’t immediately assume the first move is the right move. Let the market digest it. Because today, the first reaction may tell us what the machines heard. Next week’s reaction may tell us what investors actually think.

Summer in a bowl

Linguine with Fresh Tomatoes, Basil & Burrata.

No heavy sauce, no long cooking. Tomatoes, garlic, basil, olive oil, pasta and a big ball of burrata dropped on top. Done.

Prep time: 10m

Cook time: 15m

Total time: 25m

Serves: 4-6

Ingredients

1 lb Linguine

2 pints Cherry Tomatoes - halved.

5 -6 Garlic cloves - thinly sliced. olive oil

1/2 tsp Red Pepper flakes, Fresh Basil

8 oz Burrata Freshly grated Parmegiana-Reggiano, s&p

Preparation

Step 1

Bring a large pot of well-salted water to a boil and cook the pasta until al dente.

Step 2

While that's happening, heat the olive oil in a large sauté pan over medium heat. Add the garlic and red pepper flakes and cook for about 30 seconds—do NOT burn the garlic.

Step 3

Add the tomatoes, season with s&p, and cook for just 4–5 minutes. You want them to soften and release some juice but still taste like fresh summer tomatoes, not tomato sauce.

Step 4

Add the cooked pasta directly to the pan along with about ½ cup of pasta water. Toss everything together until the olive oil, tomato juices and pasta water become silky and coat the linguine.

Step 5

Turn off the heat.  Add plenty of fresh basil, and some grated Parmigiana and toss again.

Step 6

Put it in a big serving bowl, place the whole burrata right in the middle, drizzle with good olive oil, and a little more basil.

Step 7

Then break open the burrata at the table and let that creamy center run into the hot pasta. That's summer in a bowl.

And it fits today’s note: Kevin Warsh’s speech may be complicated. Dinner shouldn’t be.