The Warsh Trade Reverses Before He Takes The Chair
Bloomberg's top story this morning carries the headline the bond market has been writing for weeks: the Warsh trade is unwinding. The 30-year is nosing at 5%. Steepener bets predicated on aggressive rate cuts have largely been undone. The story is named. The price is set.
April CPI printed 3.8% year-over-year against a 3.7% survey and a 3.3% prior. Core landed at 2.8% versus 2.7% expected, also up from 2.6%. Core month-over-month at 0.4% versus 0.3% — modest beat, but the direction matters more than the magnitude. Real average hourly earnings printed negative at -0.3% year-over-year. The labor signal beneath the inflation print is decelerating. Both reinforce the same problem: nominal growth is sticky, real wages are eroding, and the Fed's path forward narrows.
The Fed funds futures strip is doing the talking. FOMC forward fed funds price 3.636 in June, 3.632 in July, then back up — 3.653 in September, 3.690 in October, 3.734 in December. One small cut then a reversal higher. The market is not waiting for Warsh to confirm a hawkish balance-sheet stance. It is pricing it. WTI at $101 with the Iran truce fraying is the catalyst the curve needed to abandon the easing thesis.
The dissonance worth holding in view: rates are repricing tighter while credit sits near three-month spread tights. US Investment Grade OAS at 76 sits at the bottom of its three-month range. The Global Aggregate at 27 is one basis point off the floor. Either rates are wrong, or credit is. Historically rates lead. Credit is the lagging absorber.
The watch list narrows from here. PPI tomorrow at 8:30 — consensus 0.5% headline, 0.3% core. Initial claims and retail sales Thursday. Federal Budget Balance this afternoon prints against a $220 billion expectation, with the prior at minus $164 billion — fiscal pressure on the long end is not a tail story anymore. Thirty-year auction demand and any Fed speak ahead of Warsh's first FOMC are the price-discovery events.
The carrier-wave thesis from the desk has not changed. Warsh was never the dove the consensus needed him to be. Today's headlines are a footnote on a position the bond market documented in real time. The discomfort is that the move is not over.
Educational and macro commentary only. Not investment advice. Views are my own and do not represent any employer or affiliated entity.