Warsh and wait

RECAPPING LAST WEEK

January came to a close with rising volatility as investors grappled with the latest Federal
Reserve decision, the nomination of Jerome Powell’s successor, earnings reports from technology
giants, and the possibility of another government shutdown. The S&P500 and Nasdaq Composite
indices were little changed for the week, while the Russell 2000 fell 2%. The FOMC’s midweek
decision to hold interest rates steady marked a turning point for both equities and precious
metals. Chair Powell noted a clear improvement in the economic outlook and diminished risks to
inflation and employment and gave little reason to expect further rate reductions soon. Equity
indices peaked after rising leading up to the announcement. Thursday’s open was met with a
sharp selloff in stocks and precious metals that was largely recovered by day’s end. On Friday,
news of Kevin Warsh being nominated as the next Fed chair sent gold and silver prices tumbling
by 9% and 28%, respectively, as traders dialed back expectations for policy easing. Warsh, who
served as a Fed governor from 2006 to 2011, had a reputation as an inflation hawk, although he
has recently argued for moderate rate cuts. While many remain concerned about the central
bank’s independence, Warsh is seen as a pragmatist that is less dovish than some of his rivals for
the role. His nomination may temper some risks of U.S. dollar debasement in the near term. The
dollar rallied Friday, a respite from the intense selling pressure of the past two weeks. Turning to
corporate earnings, the latest batch of reports from technology companies produced mixed
results. Shares of Meta Platforms jumped on a strong forecast, while Microsoft plunged after
reporting slowing cloud growth. Apple exceeded expectations on “staggering” demand for
iPhones, but shares were up only modestly. Economic data was sparse with a few notable
releases. U.S. Treasury yields edged higher after December’s Producer Price Index increased
more than expected, a signal that inflation may accelerate in the months ahead. The U.S. trade
deficit widened sharply in November, which could trim Q4 GDP growth estimates. Consumer
confidence slumped this month to its lowest level since 2014 as anxiety over high prices and the
jobs market persisted. On the international side, the Bank of Canada held rates steady for a
second straight meeting while maintaining its forecast for modest growth and tame inflation. The
Japanese yen came off its recent highs as speculation around currency intervention continued.
U.S. Treasury Secretary Bessent denied that the U.S. would help support the yen but reports of
the New York Fed conducting rate checks—a signal sometimes used to test reaction to a policy
decision—has fueled recent spikes in the currency. Japan’s core inflation readings slowed in
January mainly due to one-off factors but likely won’t derail the central bank’s efforts to raise
rates. Last of all, Europe’s Q4 GDP grew by 0.3%, slightly above estimates of 0.2%. Germany’s
inflation rate inched slightly higher to 2.1% YoY while unemployment reached a 12-year high.

THE WEEK AHEAD
Amid all the market-moving news that came out last week, investors once again confronted the
risk of at least a partial government shutdown. Lawmakers strived to agree on a spending bill by
last Friday’s midnight deadline while also negotiating limits on immigration enforcement.
Meanwhile, another heavy dose of earnings announcements, U.S. jobs data, and several central
bank decisions are on tap for this week. Mega caps Alphabet and Amazon are set to report, along
with other key technology companies like Advanced Micro Devices, Palantir, NXP Semiconductor,
and Qualcomm. Friday’s non-farm payrolls release is expected to show gains of around 70,000
jobs in January, and based on last week’s FOMC statement, solid economic growth seems to have
eased some labor market concerns. The rest of the U.S. calendar includes February’s preliminary
consumer sentiment reading and ISM manufacturing and services PMIs. Overseas, interest rate
decisions arrive this week from central banks in the UK, Europe, and Australia. The BoE and the
ECB are expected to keep rates level, while the Reserve Bank of Australia may consider a hike
after Q4 inflation rose to 3.6% YoY. Money markets are pricing in around a 70% probability of such
a move. Crude oil prices jumped more than 7% last week as tensions between the U.S. and Iran
continued to rise, and OPEC was expected to keep its pause on output increases in place when it
met over the weekend.

(Schwab)