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Hawks Versus Doves Debate At The Fed
This week’s FOMC meeting will be the first over which Kevin Warsh, President Trump’s dovish appointee, presides as Fed chair. Will he succeed in dissuading the hawkishly leaning committee from moving to a tightening bias? Today, Ed and Elias set out both the dovish and hawkish points that the committee no doubt will discuss in what’s bound to be a heated debate. … Also: Warsh steps into his new role planning to implement big changes at the Fed. Elias describes how Warsh views the Fed’s role, the reforms he has in store, and the potential ramifications for Wall Street.
GLOBAL MARKET CALL: Peace Dividend Should Revive 'Go Global'
The past week was a win for our "Go Global" pivot at the end of last year, as foreign equity markets mostly outperformed the "Stay Home" alternative, i.e., the US stock market. Most of the move came in anticipation of lower oil prices on a possible deal between the US and Iran to end their war. This evening, both sides confirmed that a memorandum of understanding will be signed on Friday in Geneva. Oil prices fell sharply on Friday in anticipation of a weekend deal and are continuing to decline this evening on the news. As we anticipated, the price of gold held support just north of $4,000 per ounce last Thursday and is currently over $4,300 (chart). We also expected that the end of the war, the opening of the Strait of Hormuz, and lower oil prices would benefit many foreign economies and stock markets more than the US. This evening, the Nikkei and Kospi are up 4.91% and 5.48%, while the S&P 500 and Nasdaq futures are up 0.95% and 1.59%. The logic of a peace dividend is simple. Lower oil prices reduce inflation worldwide, give central banks room to ease if necessary, allow bond yields to fall, and weaken the dollar (chart). Those are especially positive developments for oil-importing countries, particularly emerging economies (EMs). Here's more: (1) Global stocks. Go Global outperformed last week in anticipation of a peace deal and lower oil prices. Korea (12.7%), Indonesia (9.9), Chile (7.5), EM ex-China (6.2), and Poland (5.3) led the way (chart). The US ranked near the bottom at 0.6%. EM ex-China is the standout among the regions, consistent with our call at the end of last year. We expect Go Global to outperform again after the war interrupted its momentum. The Stay Home versus Go Global ratios (in US dollars and in local currencies) suggest that their long-term uptrends from 2010 through 2025 might have started to turn into down trends last year (chart). (2) Global bond yields. The opening of the Strait of Hormuz should continue to put downward pressure on oil prices in the coming months. That should calm the Bond Vigilantes around the world (chart). The 10-year US Treasury bond yield is down from the year's peak of 4.67% on May 19 to 4.42% tonight. (3) Global central banks. Falling oil prices should give dovish members of central banks some ammo to counter their hawkish colleagues. The ECB raised its benchmark rate to 2.25% from 2.00% last week (chart). It might now pause. The Bank of Japan, with an official rate of 0.75%, is expected to raise it to 1.00% to bolster the yen. The Fed and the Bank of England are at 3.75% and on hold for now. However, we expect Wednesday's FOMC to pivot from its easing bias to a tightening bias. Inflation risks are higher than unemployment risks in the US. We acknowledge that falling oil prices increase the odds of a neutral Fed stance. (4) Global currencies. The Developed World ex-US MSCI currency ratio has been weak since 2012 (chart). It did rebound in early 2025 as the dollar weakened, but has been relatively flat since then. We are neutral on this dollar measure for the rest of this year. The EM currency ratio has also been weak since 2012 (chart). Falling oil prices should provide some support for the weak currencies of some EMs. (5) Forward earnings. The forward earnings of the US MSCI and the All Country World (ACW) ex-US are rising faster this year, reaching record highs despite the war in the Middle East (chart). (6) Valuation. Based on forward P/Es, the ACW ex-US is much cheaper than the US MSCI (charts). The US is currently at 20.5, while the rest of the world is at 13.6. That's a 6.9 ppts spread. All we are saying is give peace a chance and Go Global for now.
ECONOMIC WEEK AHEAD: June 15-19
The week ahead is dominated by the Fed. Kevin Warsh delivers his first press conference as Fed chair on Wednesday, right after the FOMC releases its policy statement and its Summary of Economic Projections (SEP), which includes the Dot Plot showing meeting participants’ forecasts for the federal funds rate. We expect the Fed to abandon its easing bias and pivot toward a tightening bias. The ECB raised its official rate by 25bps last week (chart). The Bank of Japan is set to lift its short-term policy rate from 0.75% to 1.00% on Tuesday, the highest level since 1995. The Reserve Bank of Australia and the Bank of England round out the global central bank docket, though no rate changes are expected. The S&P 500 closed Friday at 7,431.46, comfortably above its 50-day moving average at 7,282.00 and its 200-dma at 6,902.33. The uptrend is intact heading into the meeting. SpaceX began trading on Friday and will continue to dominate headlines this week alongside Warsh's debut. Options on the stock go live on Tuesday. Keep in mind, US markets will be closed on Friday for Juneteenth. Here are the key releases most likely to shape investors' thinking this week: (1) FOMC and the SEP. In recent months, markets have flipped from pricing in Fed rate cuts to pricing in rate hikes, which are expected to start either later this year or early next year (chart). No one expects a rate hike on Wednesday. The only issue is whether the FOMC adopts a neutral or tightening stance. We are in the latter camp since inflation risks are higher than unemployment risks. We admittedly are in the minority. March's SEP had core PCED easing from 2.7% this year to 2.2% next year and 2.0% by 2028 (chart). With recent inflation readings running hot, that glide path looks optimistic. June's SEP will likely show less optimistic projections for the federal funds rate (FFR) over the course of this year and next year compared to March's SEP (chart). June's Dot Plot is also likely to show higher for longer FFR projections than it did in March. (2) Unemployment. Initial jobless claims (Thu) have drifted higher over the past month. The four-week moving average has climbed to 219,000, with the latest week (June 5) at 229,000. Continuing claims were at 1,795,000 with the four-week average at 1,777,000. The recent uptrend in jobless claims is worth monitoring, though it remains well below levels that would signal labor-market stress or an increase in the unemployment rate (chart). (3) Retail sales. May retail sales (Wed) should be strong. The Redbook same-store gauge rose 9.1% y/y for the week of June 5, well above the 5.4% y/y reading for official retail sales excluding food services, gasoline, and autos in April (chart). (4) Business surveys. The June regional business surveys conducted by the New York Fed (Mon) and Philly Fed (Thu) are the early reads on what June's national M-PMI might be (chart). They should continue to show the economy and manufacturing expanding nicely. (5) Industrial production. Industrial production (Mon) probably rose solidly in May, given the upbeat reading of May's M-PMI (chart).
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