Warsh’s Jackson Hole speech was “more hawkish” than expected, causing a “JOLT” across financial markets
A quiet summer week (S&P VOL at 12-month lows) with 4 scheduled events that could have moved markets: 1) PCE Wednesday morning, 2) NVDA Q2 report Wednesday afternoon, 3) BLS annual benchmark Estimate of job growth report Friday morning, and, THE BIGGEST EVENT OF THE WEEK, New Fed Chair speech at annual Jackson Hole meeting on Friday morning.
The VIX is at 12-month lows.
The PCE was “as expected” and did not move markets. 12-month PCE is 3.7%, well above the Fed “target” of 2%.
NVDA’s report was “better than expected” (isn’t it always?), with very strong profits and very strong forecasts. Shares jumped ~10% on Thursday, pulling the whole market higher (NVDA’s market cap is so big), but gave back more than half of those gains on Friday.
The BLS report showed a modest decline (79,000) in the jobs count, against expectations (~185,000) for modest growth.
Warsh’s speech was “more Hawkish” than expected, and expectations for Fed rate hikes this year increased sharply, causing the USD to rise against all currencies and gold. Warsh made it clear that his #1 priority was getting inflation “under control.”
This chart from rateprobability.com has the market pricing a 38 bps increase over current rates by the December 9 FOMC meeting.
This chart of the December 2026 3-month SOFR futures shows a 13 bps decrease from last Friday’s close, with nearly 100% of that drop happening on Friday after Warsh’s speech. SOFR (the Secured Overnight Financing Rate) trades at a discount to par. Falling prices indicate higher short-term interest rates.
The next US CPI report is September 11. The next FOMC meeting is September 15-16 (then October 27/28 and December 8/9). Chinese President Xi Jinping meets Trump at the White House on September 24, and the US midterms are on November 3.
Will Warsh raise rates? The probability of a 25 bps rate hike on September 11 jumped from around 35% to 58% following his Jackson Hole comments that underlying inflation trends have not meaningfully improved.
My take: if the September 11 CPI data is hot, he has to raise rates to maintain credibility. Is he a 25 bps-per-meeting guy, or will he show his “resolve” by hiking 50 bps? If he raised 50 bps, bond prices would rally (he’s serious about inflation).
Corporate profits are at record highs as Trump “runs it hot” with record deficits while demanding lower interest rates from the Fed. The AI boom is creating huge profits for the tech sector, while the Iran war is boosting profits for the oil/refining sector.
Inequality is rising as richer people benefit from soaring asset prices while wage earners with no savings fall behind—Cue FOX News demonizing those nasty socialists.
Currencies
The DXY US Dollar Index jumped higher after Warsh’s remarks, following a ~3% drop from late July to last week’s lows.
The DXY US Dollar Index closed the week about 4.5% above the 4-year lows it hit in January.
The CAD closed this week on its lows, down nearly a full cent from last week’s highs. The market opened lower on Monday as the “trade war” with the USA hit the headlines, but sharply widening short-term interest rate differentials (20+ bps) in favour of the USD (especially after Warsh’s remarks) pressured the CAD.
The Euro jumped last week on the Treasury’s announcement of a “bond buyback,” then gave back all those gains this week, with a big leg down after Warsh’s comments. (Remember, it’s August.) French bond yields are at a record premium over Germany, larger than the Italian premium over Germany.
The Yen drifted quietly lower Monday to Thursday, then dropped on Friday to new lows for August.
Gold
December Comex Gold rallied ~$735 (~18%) from the July lows to this week’s highs, then slumped ~$260 to Friday’s lows. Higher US short rates and a stronger US dollar hit a market that had been bid aggressively higher over the last 3 weeks. COT data shows speculators were the most net long gold on Tuesday’s highs (blue ellipse) since January.
The gold miners ETF, the GDX, rallied ~50% from July’s lows to Tuesday’s highs, but slumped ~5% on Friday.
The S&P reached an all-time high on August 13, slumped ~2% into last week’s lows, but bounced back to recover more than half of those losses by early Friday morning, only to roll over and close lower on the day.
The Russell 2000 reached an all-time high on August 17, but slumped on Friday to the month’s lowest close. Seasonality shows September as the weakest month of the year for US stocks.
The Toronto Composite Index reached a record high on Wednesday (after the “trade war” news) but slumped on Friday.
Energy
The Chairman of Sinopec, the world’s largest oil refiner, says Chinese oil demand very likely peaked last year. Trump says that the US has “struck a deal” (THE BIGGEST OIL DEAL IN WORLD HISTORY) to take control of 65 billion barrels of Venezuelan crude oil, effectively increasing US oil production/reserves—details to follow.
Goldman Sachs estimates total oil/products exports from the Persian Gulf at 15 to 16 MBD (7 to 8 MBD less than pre-war levels).
October Nymex WTI:
October Nymex gasoline:
October Nymex Ultra Low Sulphur Diesel:
ETF for US oil refining shares:
Dutch TTF Natural gas: highest prices since 2022.
Nymex Henry Hub natural gas prices drift near 2-year lows:
El Niño?
November soybeans:
December corn:
December wheat:
November rice:
December cotton:
My short-term trading
The only open trade I had at the beginning of the week was a short Yen position, established on August 19, when the Yen rallied on the Treasury announcement of modest bond buybacks. I thought the Yen rally on that news was wrong, and I stayed short into this weekend.
I shorted the Euro on Monday after it jumped higher last week on the Treasury announcement. I stayed short into the weekend.
I bought long bond calls on Tuesday, looking for a possible extension of the rally off last week’s lows. Prices drifted lower Wednesday through Friday, but I held the trade into the weekend. If the bonds trade below Tuesday’s lows, I will probably exit the trade with a modest loss.
I shorted the S&P on Friday as it fell back from 9-day highs made after Warsh’s speech, and held the trade into the weekend with a modest cushion.
My P+L had nice unrealized gains for the week.
On my radar
We’ve got one more week before Labour Day, which is late this year on September 7. Markets seem to “get real” with a bang after Labour Day.
Here’s a calendar for the coming week – thanks to Brent Donnelly:
The Barney report
My son visited us this week, so Barney had a “new guy” to play with, and he liked that. An old friend also came by for a visit, and he brought his dog, which gave Barney a great opportunity to show the new dog around. Here he is, waiting for me to finish writing this week’s notes so we can go outside and play. “Did you say ‘Go out ‘?”
Listen to Mike Campbell and me discuss markets
On this week’s Moneytalks Show, Mike and I zeroed in on the market’s reaction to Warsh’s Jackson Hole comments. Short-term interest rates and the US Dollar jumped, while other currencies and the precious metals dropped. You can listen to the entire show here. My spot with Mike starts around the 48-minute mark.
The Archive
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Victor Adair retired from the Canadian brokerage business in 2020 after 44 years and is no longer licensed to provide investment advice. Nothing on this website is investment advice for anyone about anything.
