At Wednesday’s , Chair Warsh made it clear that the Fed’s number one goal is returning to its 2% target. The reaction in the long end of the bond market was one of disbelief.
The fell roughly 4 basis points to 4.24%, while long bonds like the climbed by 7 basis points to 4.67% and the surged by more than 10 basis points to 5.20%, its highest level since July 2007. The spread between the 30-year long bond and the bill widened by roughly 20 basis points.
The message embedded in that yield curve steepening is that the market thinks the Fed is too dovish and not willing to combat inflation. As such, they are slightly reducing the odds of near-term but, in their place, putting more emphasis on inflation concerns on the long end of the bond curve. While the market may have its opinion on the Fed’s resolve to tame inflation, Warsh was adamant that they will act if necessary. To wit, he stated:
I want to stress, of course, that decisions by this committee matter a great deal, and where necessary and appropriate, we will not hesitate to act.
Powell’s Fed may have taken the market message and crafted a more hawkish tone in speeches to quell concerns. Warsh’s Fed may appreciate the market message and be willing to let the market do its work for them. Higher long bond yields will have a negative impact on the economy and inflation.
Given that large parts of the recent inflation surge are temporary, a hike might be foolish, but higher long yields may slow the economy and inflation enough to get inflation back to target. Warsh’s Fed may be willing to allow for some temporary discomfort in the bond market, particularly the long end, to meet his inflation target, which will ultimately result in lower yields.
What To Watch Today
Microsoft And Meta Beat: Stocks Head In Different Directions
After Microsoft (NASDAQ:) and Meta (NASDAQ:) both easily beat revenue expectations, Microsoft is opening higher by nearly 10% while Meta falls by a similar percentage. The divergence may be confusing at first glance, but looking past the top-line figures, the reaction makes sense.
Microsoft’s revenue rose 18% to $90.01 billion, beating the $87.62 billion consensus, while EPS jumped 30% to $4.74. Azure, its cloud platform, the division investors seem to care most about, accelerated to 43% growth, well above the 40% consensus. Microsoft’s management lowered its capital expenditure outlook slightly. In a nutshell, Microsoft’s spending guidance was positive from a market perspective while the business grew faster than expected.
Meta’s revenue also handily beat expectations, up 28% to $60.80 billion. But net income fell 14% to $15.85 billion, EPS dropped to $6.18 from $7.14 a year earlier, and operating margin fell sharply to 31% from 43%. Some of the earnings disappointment was due to one-time costs related to staff reductions. Meta raised the lower end of its 2026 capex range to $130 billion from $125 billion. Unlike Microsoft, investors got shrinking profitability paired with rising spending.
The market is distinguishing between capex that is converting into accelerating growth and capex that is eating into profits. All that said, we mustn’t read too much into a one-day market reaction to earnings.
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