Oil Falls, Rates Rise, Stocks Hesitate—Welcome to the Warsh Regime With incremental progress in U.S.–Iran peace talks, markets entered the week in a relatively subdued posture ahead of Wednesday’s FOM...
Oil Falls, Rates Rise, Stocks Hesitate—Welcome to the Warsh Regime
With incremental progress in U.S.–Iran peace talks, markets entered the week in a relatively subdued posture ahead of Wednesday’s FOMC decision and Kevin Warsh’s debut as Chair. The Fed delivered as expected on rates, holding steady, but the tone of both the statement and Warsh’s press conference skewed distinctly hawkish.
Notably, Warsh declined to submit a “dot” in the Summary of Economic Projections—an early signal of his intent to reevaluate, and potentially phase out, one of the Fed’s most scrutinized communication tools.
What worked in Warsh’s debut:
- Less forward guidance: A welcome shift. Fed communication has arguably drifted into excess—finding the balance between transparency and over-prescription remains critical.
- Clear assertion of independence: Reinforcing institutional credibility is essential, particularly in a politically charged backdrop.
- Focus on inflation: A necessary emphasis given persistent price pressures and a labor market that remains relatively stable, even prior to the Iran conflict.
What didn’t:
- Task forces: A predictable turn toward bureaucratic process. While useful for framing issues, they often delay decisive action – repeated responses to media questions with the phrase “we have a task force for that” are not reassuring.
- Policy ambiguity: Limited clarity on whether current policy is meaningfully restrictive or still accommodative.
- Delivery style: More stylistic than substantive, but the messaging came across as somewhat rigid, with attempts at levity falling flat - likely to improve with time, with more practice at the podium.
On the geopolitical front, peace talks, while still fragile, represent the most constructive progress since April. Oil markets responded decisively, with Brent crude breaking below $80 per barrel, its lowest level since the onset of hostilities. Despite this, volatility is likely to persist as supply chains normalize and inventories are rebuilt, even as lower prices could stimulate incremental demand.
The rates market, however, has remained stubbornly elevated. The 10-year Treasury yield dipped to ~4.42% before retracing modestly post-FOMC, while the more policy-sensitive 2-year yield reversed sharply - rising roughly 15 basis points after the hawkish messaging. By Thursday, yields settled into a range that suggests markets are tentatively accepting a more resolute anti-inflation stance from the new Fed regime.
Equities reflected this push-pull dynamic. Early-week optimism around peace talks drove a risk-on rally across major indices, but that momentum faded quickly. The Fed’s removal of easing bias and upward shift in rate expectations erased much of the advance, leaving markets caught between improving disinflation signals (via oil) and an increasingly hawkish policy backdrop.
Looking ahead, both near- and longer-term volatility is likely to increase. Reduced forward guidance from the Fed introduces greater uncertainty around the policy reaction function, widening the potential distribution of outcomes across asset markets. Meanwhile, a flatter yield curve - driven by rising front-end yields and more anchored long-end rates - underscores the market’s central dilemma: policy may remain tight enough to constrain growth, but not flexible enough to fully extinguish inflation risks.
From the Municipal Desk (with contributions from Ryan Riffe):
Municipals grinded stronger over the course of a shortened holiday week. With markets anxiously waiting for Wednesday's FOMC meeting, trading activity remained light for both Monday and Tuesday. A hawkish tone from Kevin Warsh’s first appearance sent treasury yields soaring along the 1 through 10-year part of the curve. In contrast, municipal bonds outperformed, with benchmark muni yields moving lower by as much as two basis points.
Since late May, sentiment within the municipal market has improved drastically. Attractive absolute yields, favorable ratios, steady reinvestment capital, and consistent inflows helped bolster the market. This positive backdrop has enabled municipals to largely shrug off the economic and geopolitical noise that continues to put pressure on other rate markets.
$11 Billion of new issue supply will look to be priced in next week, which is right on top of the year-to-date weekly average of $10.5 Billion.
Muni-Ratios Week Prior
2-YR Ratio @ 59% 2-YR Ratio @ 58%
3-YR Ratio @ 61% 3-YR Ratio @ 59%
5-YR Ratio @ 63% 5-YR Ratio @ 61%
10-YR Ratio @ 67% 10-YR Ratio @ 65%
30-YR Ratio @ 87% 30-YR Ratio @ 86%
An index is unmanaged and not available for direct investment. Definitions sourced from Bloomberg.
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