Rates surged today, with the 2-year rising by more than 13 bps to finish near 4.19%, the highest level since late 2022. Meanwhile, March 2027 Fed Funds Futures rose to 4.08%. The market has essentially priced in two rate hikes from the Fed following today’s meeting, and that is a big policy U-turn from where we stood not that long ago. The 3-month Treasury 12-month forward minus 3-Month Treasury bill spread pretty much confirms this view, rising above 50 bps.
The dollar, in the meantime, sits right on resistance at 100.40, and a breakout would likely set it up to rise toward 102.
So, at least at the outset, the bond and FX markets seem to be taking the message from Warsh and the Fed seriously. The message is that no one will hold your hand, and it sounds as if the objective is to let markets trade freely without the Fed’s influence. That would be, for someone like me, really nice. It could very well be the case that macro will once again actually matter. I hope that will be the case.
The gap from Monday on the S&P 500 is now filled. The issue for tomorrow is that it is June OPEX and a long holiday weekend, with markets closed on Friday, which could mean volatility-driven selling is in play. The VIX 1-day did rise and close over 20 today, so I wouldn’t be surprised to see it come down tomorrow and for stocks to regain some of today’s losses.
The question is what Warsh will actually do in the end and whether he is just all talk. The press conference today was revealing; there is no doubt that change is coming, and he seems rather determined to get inflation back to target. If that is real, then markets are in for a big change.
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