Warsh’s hawkish Fed nomination strengthened dollar, lifted yields, crushed gold and silver, while weak China PMIs also added pressure on commodities.
U.S. President Donald Trump’s nomination of former Federal Reserve Governor Kevin Warsh to replace Fed Chair Jerome Powell helped stall the “sell America” trade on Friday, easing fears of an aggressive rate-cutting cycle.
Why Did Warsh Dent Metal Rally? With Jerome Powell’s term ending May 15, Trump set out to find a more compliant and dovish Fed chair. After weighing candidates, including Kevin Hassett, Christopher Waller, and BlackRock’s Rick Rieder, he ultimately zeroed in on his nominee.
Warsh is viewed as an inflation hawk and one who can preserve the Fed’s independence. Allianz Investment Management Senior Investment Strategist Charlie Ripley said Warsh’s appointment would bring about a pivotal change in U.S. monetary policy. “Warsh, while having experience as a former Fed governor, is known as an inflation hawk, but his return is expected to bring a more nuanced approach to the Fed’s leadership.”
Based on Warsh’s past comments, he has signaled support for a smaller Fed balance sheet, Ripley said. Fund manager Louis Navellier described him as a safe choice, citing his prior experience serving at the Fed.
How Did Market React To Warsh’s Nomination:
- The E-mini S&P 500 futures (ES) retreated from above the 7,000 mark on Friday, following the news. Early trends suggest further weakness for the ES on Monday.
- The 10-year U.S. Treasury note yield ticked up 1.4 basis points on Friday but is retreating early Monday.
- Gold futures (GC) slumped 11.4% on Friday, dropping below the $5,000 psychological barrier.
- Silver futures plummeted below the $100-an-ounce mark.
- The Euro FX futures (6E), which are standardized, exchange-traded contracts used to speculate on or hedge against the future value of the euro relative to the U.S. dollar, fell 0.70%. The dollar strength has carried over into Monday’s session.
That said, Allianz’s Ripley said the task isn’t easy. “With inflation risks continuing to loom on the horizon, balancing political pressures to reduce policy rates will remain a challenge,” he said. “On balance, we see Warsh’s nomination ultimately leads to higher risk premiums on long-term rates and the dollar.”
Mixed China Private Sector Data Weighs Down? The official January private-sector activity data on China came in weaker than expected, denting sentiment toward commodities further. The official composite purchasing managers’ index (PMI) released by the National Bureau of Statistics came in at 49.8 in January, down from 50.7 in December. A reading below “50” suggests contracting activity.
- The manufacturing PMI also slipped into contraction (49.3), down from 50.1 in December, with new orders, inventories, purchasing volume, and employment also in contraction territory.
- The expected production and business activities index, although expanding, slipped nearly three points to 52.6.
- The non-manufacturing PMI was also below the “50” mark, dropping to 49.4 from December’s 49.5. Barring the intermediate input index, supplier delivery time, and expected business activity, all the indices suggested contraction.
A private manufacturing survey by S&P Global showed that the RatingDog manufacturing PMI edged up 0.2 points to 50.3, marking the second straight month of expansion. Buoyed by higher new orders, output growth accelerated slightly.
The lackluster private-sector activity in China, often considered a commodity guzzler, is negative for prices of industrial raw materials, especially bulk commodities such as iron ore and steel. That said, rising demand in high-tech industries such as electric vehicles and artificial intelligence (AI) infrastructure should cushion some of the downside.
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