Dow flat as Warsh speech lifts September rate-hike odds to 55%

Warsh's Jackson Hole address put a September rate hike back on the table, splitting the Dow between rate-sensitive industrials and resilient megacap tech.

The Dow Jones Industrial Average closed flat after Warsh's Jackson Hole speech revived September rate-hike odds to 55.5% from 35.4%.

"Warsh delivered a hawkish Jackson Hole speech that was broadly similar in sentiment to the July presser," said George Curtis, portfolio manager at TwentyFour Asset Management. "We fear Chair Warsh has backed himself into a corner where not hiking in September would drive a more significant loss in credibility, absent a material improvement in the data."

Amazon jumped 4.10% and Apple and Microsoft each gained about 2.10%, while Nike rose 2.21%. Caterpillar fell 1.16%, Nvidia slipped 1.70% and 3M dropped 2.17%. The 10-year Treasury yield held near 4.70% after Warsh said 54% of goods and services in the PCE basket showed price increases above 3% over the past 12 months.

The Fed's next policy decision lands September 15-16, and futures markets now price a 55.5% chance of a quarter-point hike, up from 35.4% before Warsh's remarks. A hike would mark the first increase since the Fed cut rates to a 3.5%-3.75% range, raising borrowing costs for households and businesses while pressuring rate-sensitive sectors.

Warsh, who became Fed chair in May, used his first Jackson Hole keynote to lay out six principles for running the central bank, including a firm 2% inflation target and a rejection of forward guidance. He said the Fed has "work to do" unless price pressures ease, pointing to PCE inflation running at 3.7% in July — well above the central bank's objective.

"Over the past 12 months, 54% of goods and services in the PCE basket showed price increases above 3%," Warsh told the symposium. "This is well below the post-pandemic highs of about 77 percent, but it remains well above the level of 32 percent in the two decades that preceded the pandemic."

Rate-Sensitive Industrials Bear the Brunt

The hawkish tone hit cyclical and industrial names hardest. Caterpillar, a bellwether for global construction and mining demand, fell 1.16% to $807.56, while 3M dropped 2.17% to $174.95. Nvidia declined 1.70% to $224.11, giving back some of the nearly 9% surge it posted Thursday after reporting quarterly revenue that doubled to nearly $100 billion.

The dollar strengthened 0.36% to 99.51 on the DXY index, while gold slipped 0.76% to $4,565.44 per ounce. West Texas Intermediate crude fell 0.40% to $83.20 per barrel as hopes faded for a reopening of the Strait of Hormuz.

Warsh's 'Quieter Fed' Doctrine Reshapes Market Calculus

Warsh reiterated his opposition to forward guidance, arguing that "the practice has overstayed its welcome" and that market participants should "draw their own conclusions." He also flagged artificial intelligence as a potential source of "substantially higher growth," noting annualized token sales for the two leading AI labs exceeded $100 billion, up more than 500 percent from a year ago.

Analysts at Capital Economics said Warsh "clawed back his credibility" with the speech, and that it "leaves the door open to a hike earlier than our current forecast of December, if the forthcoming price data are firm." The 2-year Treasury yield rose 6.6 basis points to 4.29%, its highest in a month, while the 30-year yield dipped 2 basis points to 5.17%.

The September meeting now hinges on the August inflation report and labor market data due in the coming weeks. Steve Blitz, chief U.S. economist at TS Lombard, said Warsh is "now set to tighten in September — unless the data give him another month of wiggle room."

This article is for informational purposes only and does not constitute investment advice.