Warsh Cools the Rate-Hike Panic—for Now

Grant Calloway

Yesterday I left you with a question: would hot inflation and AI debt jitters snap this tape? Thursday's answer was no. The Dow gained 556 points, or 1.1 percent, to 52,177.69. The S&P 500 added 0.3 percent to 7,744.06, and the Nasdaq eked out 0.1 percent to 26,713.03. The VIX slid 2.4 percent to 16.46. The tape didn't snap. It rotated, out of debt heavy tech and into value, healthcare, and financials. Good morning, I'm Grant Calloway, and it's Friday, October 16th.

Grant Calloway

Now, the headline. Federal Reserve Chairman Kevin Warsh spoke early this morning at the IMF and World Bank meetings in Bangkok, and he pushed back hard on the rate hike panic that followed Wednesday's inflation report. Remember the numbers: September CPI at 3.7 percent, and producer prices jumping 1.3 percent. Warsh's message was that the global and domestic economy has, quote, broadly conformed with our expectations, unquote, since the Fed's twenty five basis point hike in September. He said he does not prejudge meetings.

Grant Calloway

The market heard that loud and clear. Odds of a hike at the October 28th meeting spiked to 55 percent after Wednesday's CPI, sat near 27 percent on Thursday, and this morning they've dropped below 15 percent. Then he added the line traders will be chewing on all day. On forward guidance, he said, quote, we're not in that business any more. That's his words. My read is that the Fed isn't going to hand you a road map anymore, so you'd better watch the data like a hawk.

Grant Calloway

One more thing from Bangkok. Warsh described AI as an aggregate demand shock, hitting the demand side before the supply side, and he urged central bankers to approach it, quote, soberly, responsibly. Coming off the week we've had on AI debt, I'll take sober.

Grant Calloway

The tape. S&P 500 futures are up about 0.3 percent, and Dow futures are pointing higher as the hike odds fade. The ten year Treasury yield has eased from 5.19 percent to around 5.06, and that's the relief valve doing its job. The dollar index is down 0.1 percent near 98.6, close to two week lows. Gold is hanging around record territory, above 4,200 dollars an ounce. Oil is quiet. WTI is near 58.75 a barrel and Brent near 62.43, with the IEA projecting a 2026 surplus and trade frictions weighing on sentiment. European bourses are higher into the end of the week, per Newsquawk.

Grant Calloway

Data already out this morning, and it's a mixed bag. Import prices rose 1.1 percent against 0.8 expected, and export prices jumped 2.2 percent against 1.0 expected. The New York Fed's services index came in at minus 20.7, against minus 8.7 prior. On the other side, September industrial production rose 0.7 percent against 0.4 expected, and capacity utilization hit 76.9 percent against 76.5 expected.

Grant Calloway

Movers, and today it's a financials and industrials morning. Travelers reported core earnings of 9.18 dollars a share, against a Zacks consensus of 7.07 and a Newsquawk expectation of 7.39. Revenue was 12.41 billion. Combined ratio was 86.8 percent, record net investment income was 1.098 billion pre tax, and the company bought back 1.508 billion in stock. Shares are up roughly one to two percent premarket.

Grant Calloway

Truist is the one to read carefully. Adjusted earnings of 1.16 beat the 1.14 expected, but reported revenue of roughly 3.75 billion looks like a disaster against about 5.35 billion expected. The reason is a 1.45 billion dollar loss on securities repositioning plus the auto loan sale. Adjusted revenue held steady near 5.3 billion, net interest margin rose to 3.00 percent, and Truist agreed to sell 7.7 billion of LightStream loans to Carlyle, which would add about twenty basis points of capital. Shares dipped about 2.5 percent early, then reversed and are up around two percent. Rule of thumb: when the headline and the footnotes disagree, read the footnotes.

Grant Calloway

Citizens Financial earned 1.41 a share against 1.39 expected, with net income of 636 million, up 29 percent. Revenue of 2.32 billion was a hair light, and the buyback goes up to 1.95 billion. Regions Financial beat at 73 cents against 66, with 611 million in net income, and trades up about two percent.

Grant Calloway

Outside banking, two reports landed after Thursday's close. J.B. Hunt earned 1.82 against 1.81 expected, on revenue of 3.68 billion, up 20 percent and well above the 3.56 billion forecast. Intermodal loads rose 8 percent, and Integrated Capacity Solutions loads rose 22 percent. Alcoa also printed 1.82 adjusted, on 3.70 billion in revenue, with 789 million in adjusted EBITDA and 4.4 billion in cash. South32 shareholders approved the 4.1 billion dollar AliGroup deal, and Alcoa has agreements to sell parts of its Massena East site for up to 315 million for data center development. Two different companies, same earnings per share. I checked twice.

Grant Calloway

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Grant Calloway

Now, Bull versus Bear, and today's question is simple: did Warsh just fix this tape, or only postpone the problem?

Grant Calloway

The bull says the threat of an imminent hike is gone, and the ten year is sliding back toward 5.06. Meanwhile the real economy is executing. Travelers posted a 22.1 percent core return on equity. J.B. Hunt is growing freight revenue 20 percent. Regional banks are defending margins, taking their medicine on securities, and shedding non core assets to build capital. That's a company by company story, and it doesn't need the Fed's help.

Grant Calloway

The bear says hold on. A pause in October is not a cure. September PPI was up 1.3 percent, core PPI is running 5.0 percent over the last year, and import prices are still climbing. By walking away from forward guidance, the Fed might fall further behind the curve, which sets up a forced hike in December. Truist's 1.45 billion dollar securities hit shows what long stretches of 5 percent plus yields leave on bank balance sheets. And a services index at minus 20.7 says margins are getting squeezed.

Grant Calloway

Where do I land? I've traded through two crashes, so I respect the bear's math. But I've also learned you don't fight the tape on the day the Fed chair takes the hike off the table. My view is that October is likely quiet, and the bear's case lives in December. Today the bull is right about today, and the bear is right about the bill. I'd keep both on the desk.

Grant Calloway

On deck for the rest of today. Baker Hughes releases its rig count at 1 p.m. Eastern, and the prior reading was 462 oil rigs and 603 total. The monthly budget statement for September lands at 2 p.m. And at 6 p.m. Eastern, Chicago Fed President Austan Goolsbee speaks, which gives the market one more chance to read the Fed's mind after the bell. Earnings are mostly behind us for the week, with Citizens, Regions, M&T, Truist, and Travelers already out this morning.

Grant Calloway

What matters most today: whether the ten year holds near 5.06, because that's what's driving the relief. Monday, Cleveland Cliffs reports before the open and AGNC after the close, and the big earnings parade starts Tuesday. Tune in Monday. Old floor wisdom says the market hates uncertainty, which is awkward, since the Fed just announced it's selling more of it. This podcast is for educational purposes only and is not investment advice.