Macro Recap

US NFP showing weakening demand & supply constraints – Jul NFP unexpected declined by 23k (led by government, leisure & hospitality), coupled with combined downward revision of 103k in May and Jun, reflecting a cooling service-led economy. Unemployment rate fell to 4.1%, due to a massive 264k labor force exist while average hourly earnings rose by a muted 0.1% mom. 

Deadlock in Strait of Hormuz – Early-week optimism faded as the US and Iran clashed over compensation demands, dimming hopes for a near-term reopening. Conflicting signals released by each side with US asserting 100% control of the Strait while Iran threatened to target regional energy infrastructure unless sanctions are lifted. Brend back to $88-89 level.

Gradually moderate US Inflation – Jul headline CPI and core CPI moderated to 3.4% yoy and 2.5% yoy (or 0.1% and 0.2% mom), aligning with market expectations and showing stabilizing inflation. Fed should have enough comfort to maintain its current policy pause.

Credit

One of the heaviest week/month of primary issuance in US IG market WTD issuance over $50bn and MTD over $130bn.

Strong earnings from hyperscalers and BDCs drove spreads to recover.

EUR IG OAS: 77bps (-2bpsMTD,-1bpYTD) 

EUR HY OAS: 281bps (-7bpsMTD,+1bpYTD) 

USD IG OAS: 78bps (0bp MTD, +1bpYTD) 

US HY OAS：267bps (-12bpMTD,-1bpYTD)

Warsh Era Implications

New Characteristics under Warsh’s Fed

Focus on Statutory Mandates - Warsh criticized the Fed’s excessive involvement in fiscal (like QE) and political issues beyond its dual mandate of inflation and labor stability to bolster the Fed’’s long-term independence.

Structural Reform of FOMC -  Proposals include reducing the number of policy-setting meetings from eight to six per year, dedicating the remaining sessions to substantive, long-term economic topics. Furthermore, Warsh aims to better align meeting dates with the release of critical economic data (GDP, PCE, and Employment) to ensure decisions are based on the freshest information. 

Abolition of Forward Guidance -  Warsh abandons the explicit, market-guiding forward guidance deployed by Bernanke, Yellen and Powell, eliminating pre-set signals on the near-term interest rate path and pushing markets to price economic data independently. However, off-the-record anonymous media leaks (via FT, WSJ) might be revived to send ad-hoc policy hints like in Greenspan era.

Different Presidential Dynamics - Unlike his predecessors who maintained a formal distance from the White House, Warsh maintains a direct, consultative relationship with President Trump on broad economic issues (ie. AI investment, geopolitical conflicts). Warsh views open communication as beneficial for safeguarding Fed credibility, provided that he focused on macro advice rather than rate-setting pressure.

Implication to UST market

Heightened Volatility - With no steady forward guidance as a market anchor, Treasury yields become far more data-sensitive around every CPI or NFP prints. Furthermore, anonymous press leaks could deliver ambiguous signals, leading to whipsaw price action.

Upward Pressure on Term Premia – Given Warsh’s long-standing opposition to QE and Fed’s retreats from active market intervention amid high fiscal deficits, a normalization or increase in term premia should be expected, particularly the 10-year and 30-year, leading to a structural steepening of the yield curve. 

Institutional uncertainty during transition period – The novel relationship with White House introducing market doubts over Fed’s independence. Meanwhile Warsh may also face internal opposition from other FOMC members in implementing the reforms.