Things I’m Warshing This Morning

Financial media is consumed with one highly important, specific topic this morning: Fed Chair nominee Kevin Warsh’s confirmation hearing before the Senate Banking Committee.  As I type this, Warsh is still fielding questions, and despite – or perhaps, because of – offering responses that highlight his independence and inflation-fighting bona fides, stocks and bonds are mildly unimpressed.  Other factors might also be contributing to the unfamiliar sight of red on my screen.

In his testimony so far, Warsh has made several comments that were directly intended to assuage concerns that he would implement policies that would advance the President’s political agenda at the expense of economic realities.  He specifically said that he would not be Trump’s “sock puppet”, adding that “I’ll be an independent actor if confirmed as chairman of the Federal Reserve.”  Without committing to specific inflation or interest rate targets, he acknowledged that Americans are still feeling the effects of inflation and that “I think that means a regime change in the conduct of policy.  I think that means a different, new framework.” 

In theory, stocks and bonds should like the messages of independent thinking and inflation vigilance.  In practice, much of the reaction depends upon specifics within the messaging.  From a stocks viewpoint, some of the lack of enthusiasm might stem from the seemingly lower likelihood of accommodative monetary policies.  From a bond viewpoint, Warsh reaffirmed his long-held opinion that the Fed’s balance sheet is too large; shrinking the balance sheet would necessitate fewer holdings of Treasuries, particularly of the longer-dated variety.  Yields are higher by about 4-5 basis points across the curve as I type this. 

Nonetheless, today’s hearing could be for naught in the near term.  Senator Tillis reaffirmed his commitment to withholding his support for Warsh’s approval until the Department of Justice’s probes into Chair Jerome Powell and Governor Lisa Cook are terminated.  During an interview on CNBC this morning, the President was offered some ideas for ending the potential stalemate, but he sounded disinclined to take them.  Fed independence is a popular concept; confusion about its leadership is not.

Regarding that CNBC interview, we received some conflicting signals about the prospects for a lasting solution to the conflict in the Persian Gulf.   The President said that the U.S. is “going to end up with a great deal” with Iran, but also pushed back on the idea of extending the ceasefire that is set to end tomorrow.  When asked about the idea of extending the ceasefire to allow peace talks to continue, Trump responded, “Well, I don’t want to do that.”  Oil prices rose after those remarks, but only by about 2.5-3%.  Those are not moves that indicate market expectations for a resumption of outright hostility but instead demonstrate concerns about an ongoing stalemate. 

Meanwhile, the prospect of peace talks is not being greeted as eagerly by traders as it had been.  Pre-market futures rose in anticipation of the President’s 8:30 AM ET interview but gave back most of the gains after he finished.  Mentions of peace talks had been a reliable catalyst for advances over the past few weeks, with their reliability possibly fueling news-reading algorithms and thus a positive feedback loop, but they did not have the now-usual effect today.  If that relationship is definitively broken, it would imply that traders now want results rather than rhetoric.  Those are much harder to deliver.

Finally, on any normal day, the most important financial news story would be yesterday’s unexpected announcement by Apple’s (AAPL) Tim Cook.  After the close, Cook announced that he would be stepping down as CEO on September 1^st, turning those duties over to the company’s head of hardware engineering, John Ternus, while remaining as executive chairman.  Cook has led AAPL through a 15-year period of exceptional stock performance, and while Ternus is anything but an AAPL newbie – he’s been there for about 25 years – any change at the top of a key company brings at least some jitters.  The current -2.5% move in AAPL reflects that.  Investors are neither panicky nor expressing a lack of confidence in the management change, but they are at least a bit concerned about it.