As the world turns, or is it as these pages warned? Way, way, way back in ancient history on May 25th of this very year your snarky author defined what these pages believed would be the outcome of Kevin Warsh’s first FOMC meeting as Federal Reserve Chairman.
And so it happened.
The new Federal Reserve Chair spoke, figured out he was serious about inflation and markets pretty much across the board sold off.
The US 2 Year Treasury was beaten like an island nation playing France in the World Cup:
While this move at its worst caused a 16 bps increase in yields, price matters also so until the pattern of 2022 and a solid break below 98 occurs, this is just the smart money gambling on if Warsh and the new and improved Fed is serious or now.
Meanwhile the S&P 500 reacted as expected:
It wasn’t a total Warshout (get it?) but don’t worry, if he retains the idea of a hawkish hold and then a possible rate increase by September or October, the markets will get humbled real quick.
Every aspect of the market is behaving as it should as well as the USDJPY relationship which is, for lack of a better phrase, got ‘Goodfella’d’ after the Bank of Japan raised rates last night and Kevin Warsh replied with a “weak sauce” hawkish hold:
Whoops, wrong graphic:
The FOMC statement (below) is not conclusive buy it does provide an indication that the Fed will attempt to jawbone or force the smart money to sell the short end of the curve creating a bear flattener. This would be devastating for the Bank of Japan as it will need to liquidate all kinds of US assets, especially highly liquid equities, ETFs, and Treasuries to raise cash to defend the Yen; especially if it crosses 165 versus the dollar. That’s where the pressure on US markets could come from as the it will not only be Japan attempting to salvage their currencies to prevent the onset of a greater inflation.
But what does the bear flattener mean for the US equity market?
Nothing until it happens. When the 2 year v. 10 year US Treasury spread gets within +/- 0.05 bps, that’s when the panic will hit as liquidity pressure will begin to build. For the foreseeable future the FOMC and Warsh are just talking and thus why a bounce back day in equities, metals, etc. should occur on Thursday. If the proverbial Memorandum of Understanding with the Iranians holds through the weekend, look for markets to trade wide and loose until June 26th when most of Wall Street will exit the city and begin the week long July 250th birthday party for America.
By mid-July look for a touch of reality to come back as the realization that a MoU does not guarantee ample energy and raw material supplies that have been unavailable to the global economy for over 100 days.
For the record, below is today’s brief, concise, and somewhat clear FOMC statement where inflation is the number one target of the new Fed chair, at least for the time being.
