Warsh Said Nothing New and the Market Repriced Anyway: Without Forward Guidance, the Data Runs Everything

Jackson Hole: A Hawkish Reading of a Familiar Message

The eventful part of last week was Warsh’s testimony at Jackson Hole, which has been taken extremely hawkishly by the market. Russell was careful not to sound like a broken record, but does not think Warsh said anything new relative to the Fed press conference. The message was that 65 months of above target inflation sits squarely with the central bank, that the Fed has work to do, that the labour side of the economy is going along quite nicely, and that the issues all sit on the inflation side of the US economy. All of that was said at the press conference. His position remains that Warsh is talking hawkish and that the actions are going to be dovish.

Two things Warsh did not do are as informative as what he said. He did not address any of the inflation measurement questions, which Russell reads as waiting for the working papers to come out before bringing that forward. He did address inflation expectations, describing them as well grounded and well anchored, which is clearly the case. On the substance he could not have been clearer: inflation needs to be trending in the right direction.

No Forward Guidance Means the Data Takes Over

The consequence of the testimony is that this month’s numbers determine what the Fed does, and there will be no forward guidance to lean on. People are going to have to do their own homework: watch what PCE is doing, what inflation expectations are doing, what break evens are doing, what CPI is doing. Russell expects the data to create considerably more volatility in these markets than participants have been used to with this Fed.

His own read of the data is that the economy is doing well and inflation numbers are trending down. The rest is a question of what arrives in front of the next Fed meeting.

Last Week’s Data: Housing Softening, Inflation Expectations Cold

There was more evidence of house price weakening. The housing price index was flat, coming in at 0 percent against 0.2 percent expected, so prices have not started falling but they have stopped rising. New home sales were down at 0.6 against 0.62 expected. PCE, the number the Fed watches above all others, was bang on the money month on month and in line year on year at 3.3 percent against 3.3 percent expected. GDP came in right in line at 1.5 percent against 1.5 percent.

Michigan consumer expectations beat a little at 51.5 against 50.6 expected. University of Michigan inflation expectations, which Russell singles out as his favourite number, came in cold: the one year fell to 4.0 percent against 4.3 percent, and the five year was in line at 3.3 percent against 3.3 percent expected. Inflation expectations continue to be well anchored.

This Week: A Climactic End to the Week

The week builds to a climax. Chicago PMI comes today, ISM manufacturing PMI on Tuesday, and ISM services PMI with the prices paid component on Thursday. Those all feed into the large language model data feeds that generate inflation forecasts. Friday brings the granddaddy: non farm payrolls together with average hourly earnings.

Russell’s caveat is that non farm payrolls is diminishing in importance at the moment, especially after what Warsh said. An outlier number there will not have the impact it would otherwise have, because the focus is simply not on the US labour market. It is clearly on the inflation side of things.

Fed Pricing: September Flips to 60 Percent Hike

Fed funds hike expectations switched completely on the testimony. Going into it the next meeting was priced at roughly 65 percent hold and 35 percent hike. It now sits at 40 percent hold and 60 percent hike. December stands at 12 percent hold against 88 percent hike. One year out, at the end of July, pricing is 5 percent hold and 95 percent for a hike. Of that 95 percent, 15 percentage points represent four hikes or more, which Russell described as quite frankly insane.

Markets: Bear Flattening, Gold Becoming a Buy

Ten year yields sit at 4.71 percent, up a basis point on the week, so little change there. Two years are at 4.32 percent, which takes 2s10s down to 38 basis points. That is significant bear flattening on the US Treasury curve and is not particularly good. Warsh did move the market: the 30 year came off on his statements while the two year rose a large amount.

Nasdaq is at 28,400, down 600 on the month. The S&P is at 7,695, up around 55 on the week. Gold is at 4,438, down 200 on the week, and Russell thinks gold is becoming a buy at these levels. The dollar index is at 99.6, up about 1 percent. The yen is back into a small weakening trend and JGB yields are up, with Japan continuing to serve as a lead indicator for where the US is heading. Oil is calm: WTI at 86 dollars, Brent at 91 and unchanged on the week, with natural gas at 2.92, up a smidgen. VIX is at 14.4, down about 0.7, and MOVE is down at 71, three points lower than a week ago. Five year break evens are at 2.3 percent, down four basis points, and ten year break evens at 2.31 percent, down three basis points. Markets are generally doing pretty well and are quite resilient in the face of the hawkish rhetoric.

Liquidity: Slight Expansion, Risk Premium Still the Anchor

The Hilbert five factor liquidity indicator is at 6.76, up 0.26 on the week, and the six factor model is at 6.46, up 0.22. The Z score is positive 0.62, up about 0.09 on the week. In layman’s terms that is a slight expansion of liquidity, which is bullish towards Bitcoin.

Within the six factor model the one factor really creating a problem is the risk premium. Unsurprisingly, the risk premium in the US Treasury market is at two, three and four year highs, and that is the major anchor on liquidity expansion.

Options: The Smile Has Swung Firmly to Calls

At the money implied volatility is at 34 percent. Five delta puts are at 41 and five delta calls at 45, giving a 7 point premium for puts over at the money and an 11 point premium for calls. The market swung last week on the big move in Bitcoin, and participants are now firmly in the camp of wanting to own calls over puts. The volatility smile reflects that.

On realised against implied, realised volatility is around 37 while implied over the last week has been around 33, a four point gap. Max pain for the end of September sits at 70,000 with 13 billion dollars of options expiring, which is a big number. That will put some form of cap on Bitcoin and tends to act as a magnet, though the market can ignore it completely and go higher from here.

Bitcoin Technicals: 82,000 Is the Door

The technical picture in Bitcoin still looks very good. Support now sits at 75,000, with very strong support running from 72,000 down to 65,000. A dip into the low 70,000s does not look particularly likely at the moment outside of some global macro event, but there is genuinely large technical support at those levels, and Russell regards Bitcoin in the low 70,000s as a very nice buy.

On the topside resistance sits at 82,000. If Bitcoin can take 82,000 out, which he thinks is likely to happen this week if pressed, then 86,000 and the 94,000 area come into view. There is a lot of congestion up there, so taking 82,000 opens the door to a little blue sky into the high 80,000s. The gamma profile reinforces it: there is some gamma on the downside at 75,000, where market makers would be expected to hedge on a break, and negative gamma all the way up, with plenty at 82,000 and 84,000, more at 85,000, and a really large amount at 90,000, which could add fire to any move on the upside.

Reserves: Gold Passes Treasuries

One item of interest outside the weekly run through: since the beginning of the year there has been a switch in global reserves, and the largest constituent is now gold. Gold stands at 27 percent of global reserves against 20 percent at the start of the year. Treasuries are now at 22 percent and the euro at 15 percent. Central banks have been buying gold like it is going out of fashion for the last five years, so the direction is not a surprise, but gold is now the biggest single component of global monetary reserves.

In DeFi, Ethena is unchanged at 4.1 billion dollars in USDe, yielding 4.7 percent.