Warsh Says Money Is Too Easy, Spiking Odds of a Rate Hike
September hike odds jumped on one sentence about underlying inflation from the Federal Reserve chair.
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The much-awaited speech by Fed Chair Kevin Warsh at Jackson Hole on Friday morning triggered broad selling. Warsh didn’t say anything surprising or overtly hawkish, but market participants were ready to hit the “sell” button regardless of what was said.
What concerned the market most was the suggestion that the Fed may not be done fighting inflation. He stated, “We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do.”
That comment was enough to boost the likelihood of a quarter-point rate hike at the next meeting on September 16 to 57% from 35%. The odds of at least one hike this year are now at 88.5%.
Warsh and the AI Question
After the powerful Nvidia (NVDA) earnings report on Thursday, I was curious how Warsh would handle the strong chip demand and pricing as an inflation input.
Warsh did not directly confirm that AI spending is inflationary. His spin was that the scale of the AI buildout proves money is still too easy. That avoids the use of the word inflation but it means essentially the same thing. The massive capital spending means that money is too cheap and the only way to deal with that is to make it more expensive by raising rates.
Selling Was Uneven
The selling that hit after Warsh’s comments was very uneven. The DJIA was close to flat primarily due to strength in Magnificent Seven names Amazon (AMZN), Alphabet (GOOGL), Microsoft (MSFT) and Apple (AAPL). The Nasdaq 100 (QQQ) lost about 0.6% with PayPal (PYPL), Nvidia (NVDA) and chip-related names driving the decline.
The real damage was to the Russell 2000 (IWM), which was down 1.35% for its worst session since July, and biotechnology (IBB), which was brutalized for a loss of 2.7%. Overall market breadth was around 36% positive with new 12-month lows of about 135 names. The most notable statistic on my screen was that there were only about 20 stocks up more than 10% on the day and nothing much at the highs when the closing bell rang.
It was another example of rotational action but it was lopsided against the majority of the market while a few Magnificent Seven names held up the senior indices.
Does This Accelerate the Seasonal Pressure?
The big question now is whether this action is going to accelerate the seasonal pressure I have been concerned about for a while. It has been slow in developing, and good earnings from Nvidia on Thursday fooled some folks into thinking everything was fine, but we are now moving into September, which is historically the poorest performing month of the year.
The inflation worries were solidified by Warsh to some extent and it is reflected in the poor bond market action as well.
Game Plan
I’m already positioned with high cash levels, but it was still a painful day, especially with my high exposure to the biotechnology sector. I’m not worried that this is a major top, but I do expect to see some struggles in the weeks ahead.
My plan to be a slow, incremental buyer into weakness is still in place, but when the selling is this abrupt and widespread, it does cause some concern. Nonetheless, I’m still optimistic that great opportunities will develop during a few weeks of poor market action.
Have a great weekend. I’ll see you on Monday.
At the time of publication, DePorre was long AMZN.
