U.S. Indexes were on the backfoot as major gainers on Thursday pared initial strength on earnings (NVDA -4.6%, CRWD -4.2%). Friday, Marvell earnings also weighed on Indices, after earnings were considered disappointing given lower-than-expected gross margin guidance and the deferral of longer-term fiscal guidance. Adding pressure to cyclical-exposed names was Fed Chair Warsh’s speech at Jackson Hole proving hawkish. Warsh outlined that inflation remains a greater concern than employment, as expected, even in light of better-than-expected inflation figures through summer. Warsh’s clearer picture of the economy comforted the long-end after an underwhelming July press conference, allowing spreads to flatten. Short-end yields rallied as he noted the Fed has more work to do, unless progress towards its 2% inflation target resumes. In response, the Dollar saw broad-based strength, the Treasury curve flattened, and spot Gold was weighed by the renewed Fed rate hike bets; Barclays and SocGen see hikes in September and December. At the same time as Warsh’s speech, the preliminary NFP annual revision was -79k, and University of Michigan final revisions were slightly better than expected, with the 1 Year inflation expectation ticking down; price action was determined by Warsh. Oil prices settled slightly lower with major developments on US-Iran absent. The new economic sanction approach, “Operation Economic Outcast”, has seemingly got underway with the Treasury set to sanction UAE branches of Egypt’s second-largest bank. Fed Chair Warsh’s Jackson Hole speech offered a little more than traders were anticipating; many had expected him to say little, given his bias against any forward guidance. Warsh’s message was heavily inflation-focused: he noted 12-month PCE was at 3.7%, and the six-month rate at 4.1%, both above target, and he stressed that more than half of PCE components are still rising above 3%. He said that underlying inflation trends “have not meaningfully improved,” despite the better-than-expected prints over the summer months. He said the Fed has more work to do, unless progress towards its 2% inflation target resumes. He again put price stability ahead of the labour side of the mandate, judging labour markets consistent with full employment. On growth and economic conditions, Warsh said the economy was resilient and strengthening and pointed to AI-driven capex as a growth driver, adding that he would be “hard pressed” to call financial conditions restrictive, citing easy credit spreads, looser bank lending standards and firm equity markets. And that combination gives the Fed little urgency to ease. As expected, however, there was no explicit forward guidance: July’s FOMC majority preferred to wait for more data before moving, and Warsh reiterated guidance should stay “limited and circumscribed.” Accordingly, there was no explicit signal for the September meeting. In wake of the speech’s release, Money Market pricing tilted more hawkish, now assigning around a 50% probability of a rate hike at the September confab (versus around 36% prior to the release). It is also worth noting that Fed officials more broadly remain divided on the inflation outlook. Last week, Kansas City Fed President Schmid (2028 voter) and Cleveland Fed President Hammack (2026 voter) argued current rates are not sufficiently restrictive and further tightening may be needed, while Boston Fed President Collins (2028 voter) described policy as mildly restrictive and Chicago Fed President Goolsbee (2027 voter) said he is waiting for evidence on whether the inflation shock will persist. Hammack the Cleveland Fed President already spoke a couple of times on Thursday, but in her remarks on Friday she does not see restrictive financial conditions. The hawk reiterated that it is time for the Fed to act by hiking rates, that waiting will create pain, and that they are committed to bringing inflation to its target. Hammack added she keeps an eye on the market to make decisions, and that markets are not a substitute for the Fed. Interest rates are the main and clearest tool for the Fed, and the balance sheet is reflecting many things, starting from the GFC. Consumer Sentiment ended at 51.7 in August, above the expected 51.0, albeit -6% M/M. Current Conditions also declined to 51.9 from 54.8, slightly above the expected 51.8. Consumer Expectations fell to 51.5 from 55.4, above the 50.6 consensus. Inflation expectations ticked lower for the 1yr to 4.0% from 4.2% (exp. 4.3%), whilst the 5 year was unchanged at 3.3% as forecasted. University of Michigan Economist Joanne Hsu wrote that “With ongoing policy uncertainty including the Iran conflict, consumers anticipate further increases in gasoline prices both in the short and long run”. Ahead, consumers expect their purchasing power to erode, “with a growing majority expecting inflation to outstrip income gains.” Elsewhere, Oil closed flat while Gold was hit hard ending Friday’s session with a 3.25% fall.
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