Warsh spoils the gold party. Busy week ahead.

Welcome to the Saxo Market Call. Before we get started, it's important we emphasize that the views and opinions expressed in this podcast are those of the hosts and guests and do not constitute investment advice or recommendations. All information provided is for educational and entertainment purposes only. Hey everyone, it's Monday, 31st of August, 2026, and we got a hawkish speech from Fed Chair Kevin Warsh. No secret about that. I think essentially his stance and his way of speaking about Fed policy, observations about what the Fed's job is and on inflation, pretty much a repeat of his first speeches as he came on board as Fed Chair. I think the market reaction, and to a degree myself as well, in fact, outlined what would surprise the gold market, for example, the most in Friday's podcast. And that's exactly what he delivered, more or less, anyway. And the gold reaction, I think, was the most telling. But anyway, back to what Fed Chair Warsh said and why it was a bit more surprising than otherwise was the market lean being the wrong way around after this Treasury buyback increase announcement, the market figuring, well, if the Treasury is panicking here and is concerned about high yields going higher still, especially now that we're at the cusp of these key breakout levels in the 10-year and the 30-year had, in fact, broken those highs since 2007, surely the Fed will have to play ball. We all know we're heading in the direction of Treasury-Fed coordination, and we shouldn't really expect anything hawkish from Fed Chair Warsh. Instead, Warsh came out pretty much all guns blazing on trying to talk up Fed credibility, at the same time talking up the lack of forward guidance, basically saying things like, well, inflation is too high, and if it stays this high, the Fed has, quote-unquote, work to do, that the policy rate is the chief transmission or the chief policy tool for addressing the situation. Essentially, inflation is too high, and we need to do something about it if it's going to stay this high. But we're not going to make any concrete hints at what we may or may not do in September. So what do we see? We see the two-year is about six basis points higher. It's much higher still by Friday at the highs, at least. And it came back in a tad here. We've moved the September odds, the September rate hike odds, that is, to around 60% currently, from much, much below that, of course. But we're still talking about, if we're trying to cobble together, okay, what is the follow-on situation going to be here? We're still talking about two Fed rate hikes priced into the forward curve, plus a tiny bit of maybe they'll do more way out in the future, late 2027 kind of time frame, or at least later in 2027 time frame. So, you know, is this a question of a hike or two, or is this the beginning of something more profound? The market, I think, should remain skeptical that the Fed is going to do a serious rate hiking program, because what we all know is that we're looking at these massive deficits and the massive financing costs essentially at records of GDP already before any hikes are going to happen. And with the Treasury refusing to increase coupon issuance, those costs are crowded at the front end of the yield curve, so that policy hikes would transmit straight into interest payments and servicing of the national debt becoming that much greater. So it's just a difficult, it's a cognitive dissonance problem with what the heck are they going to do about this to prevent the cost of the debt from blowing out. And there's all manner of speculation on that front, what that could look like, you know, from, you know, from various ways to allow banks to vastly increase their holdings without affecting their risk ratios and supplementary leverage ratios is one of the ones that's thrown around, and other measures. And I'll put a link to a Katie Martin FT article, which just, I think she does a really good job of giving this sense that, look, we shouldn't expect deficits to come down in any meaningful way. We're all waiting for what is this financial repression going to be? What does it look like? And when is it coming? And it's probably coming soon. And it's gonna look different from just hurrah Fed QE of the days past, when it just meant that you're crowding out safe stuff, and everybody needs to take risks. I want to say safe stuff, safe treasuries, because the Fed is buying so much, and therefore we need to take risks elsewhere in the system and buy stocks. For example, it could look like forcing more savings and more capital into treasuries, which is a far different setup than simply the old days of QE. So what am I trying to say here? It's not a lot, really. That can be translated to a market view. But I do think it does mean that what is the follow-on ability at the front end of the yield curve to price a lot more, I would say, is limited. The long end of the curve, it's about how fast does the treasury move to try to do some kind of financial repression move. Does that move come now, or do we wait for some kind of breakout to occur in long yields? And in the meantime, if that breakout is allowed to occur or does occur, I think it risks being a very negative for risk sentiment. And we did see risk sentiment reaction rather negative on Friday. Pretty modest stuff, though. I mean, yes, the SOX index was down almost 3.5%. I think a lot of that linked to the Marvel News, this really ugly response to their earnings report, and really a company that continues to grow like crazy. But this big deal with Google being so far out into the future in terms of when the revenue and profits are going to come, just a recalibration there. And as our equity strategist Ruben points out, you kind of have some similarities and parallels with the biggest company reporting this week, a true MAG7 company, Broadcom, reporting on Wednesday. They do the whole custom chip routine as well. Some questions around valuation there. I don't know. It's certainly a name worth following this week. Some other fairly big reports coming this week. We've got Dell up tomorrow already. Of course, the server maker and very active now in the data center. And Palo Alto Networks, another cybersecurity company. And then Snowflake, one of the big software and the market deciding there's a big AI upside for Snowflake as well. They're up on Wednesday. Thursday, we have Zscaler in Siena, Siena with a C reporting. So yeah, slightly negative day, but this wasn't exactly, the market wasn't thoroughly spooked. It was curious to see that the entire yield curve did lift in the U.S., U.S. Treasury market. So the market is saying, well, the Fed will hike more, but that doesn't necessarily mean that this will result in a hiking into, until the economy breaks and it goes into recession. Therefore, we need to actually outright start buying duration. That trade wasn't exactly what was being made, but we did see a yield curve flattening, a so-called bear flattening of the U.S. yield curve. Again, it's the long end, I think, that is the critical focus here for any kind of follow-on reaction. By the way, in further comments, I think it's kind of things he said before on Warsh's Friday speech, talking about the employment, that the U.S. labor market is essentially at full employment, that the job gains, slow pace is more about demographics and not an economy in decline. I would agree with that. We have a general sort of low hire, low fire setup here for the labor market in the U.S. A lot of that is linked to demographics, that aging boomer generation that is essentially going to all be at least in the retirement age category within a few years. We also got the non-farm payrolls for the year from March 25 to March 26. The market was looking for actually a positive adjustment there of like, I think it was 180 something thousand. Instead, it got a 79,000 fall in the payrolls. I mean, this is semi-ancient history. We're talking about the year through this March. So that's many, many months ago already. But that was a slightly negative report. And of course, this is important coming into this week. Although the focus is more on inflation, the labor market is still at full employment. So I think it's a little bit more critical. The labor market is really critical. But I think it takes some time, some months of accumulated data, at least a couple, if not more, to get a proper sense that the labor market is either deteriorating further, we have seen some soft prints, or that it's stable and just fine, or even maybe even picking up. So it is a key focus. But I think the inflation stuff is where a lot of the market is. The market reaction function is a bit more touchy. We also got a sour note on Friday in the form of the Chicago PMI. It was far weaker, 47.1 versus the 57.9 expected, 57.6 the prior month. This was off-kilter relative to some stronger other regional surveys. So let's see how this reads into the ISM manufacturing tomorrow. And we'll have the non-manufacturing services, in other words, later this week. Today is a UK bank holiday. So we might have slightly sluggish markets in place. We're going to have a little bit of a sluggish market. So we might have slightly sluggish markets in places. We do get the German national CPI, the flash print for August later today. A couple of central bank meetings this week. as well. We have the RBNZ on Wednesday. They're looking to hike 25 basis points. They've been flagging a new hiking cycle for a while now. That's almost fully priced, and the market will be looking for the guidance. So we're already priced for a good, decent part of the next hike to occur in the October meeting, and more than two hikes in total to have occurred through the December meeting. So how hawkish are they on policy is the question there. A very different question for the Bank of Canada. We've seen inflation really coming in lower in the Canadian macro data. We touched for the so-called trimmed mean, which is the core measure that I think people follow the most, fell more than expected and all the way down to 1.8%, far different place from where we are in the U.S. for the most recent data point in July. So they're certainly in no hurry to do anything except sit on their hands for now. As well, you have the whole trade tensions flaring up again, which brings with it tremendous growth risks for Canada, which is far more reliant as a percentage of the economy on trade with the U.S. than vice versa. So not looking for anything and only a bit more than a 50% odds that we'll see even one rate hike through the December Bank of Canada meeting. In terms of the market reaction, getting back to besides the Treasury market to Friday's speech, no massive surprise that we saw the dollar picking up. It's a pretty weak, I would say a pretty weak move relative to the rates move. And I found that a bit curious, maybe a bit telling. Is this the market sussing out that there's only so much higher that U.S. yields can go before we get this financial repression move? I don't know. Is it the risk of Japanese official intervention? Japan admitting Friday that they spent, close to 100 billion U.S. dollars in yen equivalent in propping up the Japanese yen over the last month, a massive amount. Dalian did poke above 160 briefly late Friday, and it even tarried there a little bit overnight in Monday's trade today. But it was already back below the level it was trading before Warsh's speech. Some of the price action might speak to some intervention going on here, maybe some feeling that this intervention is coming, so might as well sell at these good levels. I don't know. Something to track at least. And again, quite curious that we're essentially back to unchanged from where we were before Warsh's speech. Now, looking over at Eurodollar, which is not impacted as much directly by the intervention, we're still below the levels for Eurodollar, therefore a dollar higher. We were trading before the Warsh speech. 116.40 to 50 area, it traded down decently below 116, but it was back slightly above 116. Just before I came in here to record the podcast. So still, weak beer, weak reaction relative to the rates reaction in the U.S. Now, the bigger reaction was in gold, as mentioned, and I think it's particularly disappointing technically that gold sliced all the way back down through that 200-day moving average. This sub-4,500 level has been trading, it even traded sub-4,400 briefly overnight. It looks damaged short term. Whether this is going to mean a full retest, whether this is going to mean a full retest, I don't know. But I think it's going to be a full retest. The gold bulls have some proving to do here in the short term. Long term, we are still very constructive on the outlook for gold prices, especially given that anticipation of the whole financial repression theme incoming at some point. The question will be, of course, the path for the gold bull case. Yeah, and then we have oil prices back on the bid here. A new exchange, of hostilities in Hormuz Strait with the U.S. attacking what it said were some, I think, some launching sites on an island or somewhere overlooking the Hormuz Strait and Iran responding with some kind of attack on U.S. bases in Jordan. So we always have to keep our eyes out for that situation. It does not seem to be going into a nice direction at the moment. And there's still the backdrop of the U.S. threats to shut down Iran economically. What does that mean? A couple of links for you today. I will put them in today's podcast. Episode description, as usual, in addition to the Katie Martin link, I think a couple of interesting ones for you. I thought the conversation on thoughtful money with Adam Taggart with Michael Every was the latest good conversation. And it really does a better job of laying out this whole stable coin case for the U.S. dollar and its implications generally than sort of the specifics of it than I think I've seen anywhere else. I still believe strongly that it is a case of the U.S. having its cake and eating it too. It just assumes that everybody endlessly wants to own these non-yielding stable coins and that, of course, that those stable coin purchases end up being parked in U.S. treasuries. Maybe this will all happen. Maybe this is the way to the future. Or is it, as Katie Martin points out and many others have pointed out, that it's at the point of a gun that the U.S. can, in the end, enforce what people or where people put their savings. This is in reference to Trump's, I don't have the specific quote here. Sort of the end, it's our military that insures things one way or another. So there's certainly that one to listen to. There was also a good, an ex-post from Paolo Macro assembling four magazine covers, which he called a superfecta. If you don't know what a superfecta is, that's when you, I guess when you choose all four in the correct order of, in a horse race betting ticket. But basically a Time Magazine cover with Sam Altman and Greg, this is named Brockman. I didn't even know who he was from his picture. Co-founder anyway of OpenAI saying something about trust us. An Economist cover that says, could AI become conscious? A Barron's cover. I think this one's more telling in terms of the classic contrarian market timing. It says, there's no end in sight for the AI bubble, which is unlikely to bust anytime soon. And then another Time Magazine cover that assembles, or that touts that it's covering the hundred most influential people in AI. So of course, the idea here would be that we're set for this AI bubble to deflate suddenly and very soon. If this classic magazine time, sorry, magazine cover contrarian, set up is, delivers, if you will. I don't know. I do think it's out there somewhere, some kind of adjustment in the pace of AI spending, but timing this is anyone's guess. All right. And then finally, there's Mark Zuckerberg's Social Reckoning, an article from the New Yorker, thanks to FT Alphaville for that one. Oh, and then this is one I definitely wanted to mention because I saw a couple of different headlines related to this. Some really strong concerns. We've talked a little bit about this, recently. It's not just the price of grains that are going higher, and that's a key input for inflation, especially for everyday things at the grocery store, but it's also aggravating it and feeding the rise in grain prices, or these rises in refined products. It's not just the crude oil price, remember, it's those refined products that are a bigger problem, diesel, gasoline, and globally speaking, as well, the rise in fertilizer prices to a degree linked to the production of oil, and the state of Hormuz crisis, and the lack of fertilizer coming from that region, a lot of that linked to Qatari gas production and fertilizer plants. And there's a decent Wall Street Journal op-ed that also points out China's sort of embargo on exporting phosphate fertilizers and the implications there. I don't like this headline, but it's a terrible headline to consider. A food crisis may be coming. There was something else about the next price shock in the U.S. supermarkets, so all this is really critical stuff for the economy, for energy into the political space as we go into the midterms, all kinds of things, certainly worth your consideration. And as well, with this cutting off of phosphate fertilizer exports, it is China once again leveraging its power over supply chains, just deepening the whole framework we're looking at here of the all costs. So lots to chew on as we look at the week ahead, which is looking a little bit busier on the macro front, lots of busyness on the calendar for sure. We just got an interesting spark into the markets with Warsh's speech on Friday. We're still poised right at the edge of that 10-year yield at 4.75%. Is it going to go higher? What will be the fallout if it does? Lots of questions to look at this week. Do stay careful out there, and we'll be back soon with the next Saxo Market Call. This has been the Saxo Market Call podcast. Thanks for joining today's episode. We're always happy for your feedback and questions of all kinds. To reach out, you can drop us an email at marketcallatsaxobank.com. That's marketcallatsaxobank.com. Saxo, serious trading worldwide. We'll see you next week. 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