The second half of the year is underway, and it’s beginning with the market doing a reprisal of one of its favorite schticks, the “bad news good” routine in which what’s bad for Main Street America is good for, well, the market and its myopic focus on whither interest rates. Recall that, following the Federal Open Market Committee’s meeting two weeks ago, the punters were penciling in September as the likely timing for a hike in the target Fed funds rate. Inflationary pressures, exacerbated by the ongoing war in the Middle East, had already taken a long-hoped for rate cut off the table, and the market odds were now on as many as two rate hikes before the end of the year.

Jobs Blow Hot, Then Cool

Inflation was not the only factor driving rate hike expectations. The labor market, which had been all over the place late last year with alternating declines and advances in monthly nonfarm payrolls (NFPs), found its footing in the second quarter of this year with three successive barnstormers of a BLS report in April, May and June. The June report, containing data for May showing 174,000 payroll gains, arrived at the FOMC’s doorstep just in time to unleash a spate of hawkish Fedspeak by Committee members and chairman Warsh himself ahead of, during and following the June meeting.

Hence the market’s relief this morning when the BLS report containing June data came out well shy of the 100,000 NFPs economists had predicted. And the modest 57,000 payroll gains for June was not the only treat in the bag, as the BLS revised down the previous two months’ worth of payroll gains by 74,000. Those 174,000 jobs from the previous month got hacked down to 129,000. That suggests a jobs market that is cooling – but far from going into deep freeze. In 2025 the average monthly gain in nonfarm payrolls was just 9,670. For the first six months of 2026 the comparable number is 92,000, even after the downward revisions.

Apocalypse Not Now

Economists have spent the last year trying to figure out what the jobs numbers tell us about the threat of AI to result in widespread layoffs and permanent job losses. To be perfectly honest, they have come up with few compelling insights – other than to say that nothing in the current cache of data suggests an immediate “jobs-pocalypse.” Yes – it’s rough going for recent college grads dealing with the vagaries of AI hiring tools and resumes that disappear into the black holes of online employment sites. The monthly layoff data provided by Challenger, Gray and Christmas have also trended bleak recently. But the national overall unemployment rate remains relatively low – 4.2 percent in today’s BLS report. And average hourly wage growth of 3.5 percent over the past year has, it would seem, more or less kept up with inflation.

One might think that this sets up a bullish picture for the market in these early days of the second half. A cool, but not cold, labor market along with subsiding tensions in the Middle East (maybe) sounds like a buy recipe. But not necessarily. Even in the brief time it has taken to write this report, the S&P 500 has retreated into negative territory for the day (hence the two, not three, cheers in the title above). Volatility in the AI trade, as we discussed at length last week, is not taking a summer break. As always, there are plenty of ways for things to go pear-shaped. But at least from the standpoint of the macroeconomic picture, things could look worse.

Like any good complex organism, the AI narrative is splitting into multiple versions of itself, each reacting in different ways to the daily flow of information that feeds its life support systems. Time was when this was a simple, one-celled story. Buy AI! The collective wisdom of the market came up with a catchy name for the trade – the Magnificent Seven, mega-cap companies close enough to this emergent technology to be considered viable proxies. We were always a bit dubious about the logic underpinning the Mag 7. Nvidia – sure, its graphic processing units are essential for powering the large language models that put generative AI capabilities at the fingertips of the human user base. Microsoft, Alphabet and Amazon are the hyperscalers, supplying cloud computing space for the models to run on. We saw a less compelling case for the other three names in the Mag Seven – Apple, Tesla and Meta – to be fundamental cogs in the AI story. But hey, whatever – the market needed a go-to trade, and these are the tech industry’s leading behemoths, so why not?

Memory Is Not What It Used to Be

There were at least three mutating sub-narratives among the Mag Seven during the Thursday trading session this week. After the market close on Wednesday, memory chipmaker Micron released a blowout earnings report showing a 15-times surge in quarterly profits and a year-on-year revenue growth rate of 345 percent. These memory chips, long regarded as among the least sexy bits of tech architecture, are essential parts of the AI infrastructure value chain, and they are in hot, hot demand. So much demand that Micron’s gross profit margin more than doubled from a year ago to around 85 percent. That’s a level more befitting a luxury goods maker than a semiconductor shop.

Good news for Micron, not so good for anyone who has to buy these memory chips. Like, say, Apple, which announced some sizable price increases for its iPads and Macbooks, specifically citing the cost pressures arising from memory chips. Or Microsoft, which, let us remember, also sells products alongside its newer, jazzier business line of cloud computing. Or, let’s be honest, any mega-cap tech company whose sky-high capital expenditure outlays have increasingly been drawing analysts’ scrutiny.

Buy This, Sell That

As investors consider reapportioning their AI investments into new hot-demand names like Micron or South Korea’s SK Hynix – the latter seemingly single-handedly powering the Korean Kospi stock index to triple-digit gains this year – the question arises as to where the funds for these new momentum-chasing investments are going to come from. Mr. Market seems to have an answer – the Mag Seven! So another sub-story that may be going on here is selling pressure on stocks like Nvidia and Amazon as investors redirect funds out of those companies to be on what they think is the right side of the memory trade.

But there is more to this “source of funds” story than memory. Anthropic, which many observers now believe is the leading AI model company, is due to go public sometime in the second half of this year (Anthropic’s main competitor, OpenAI, m ay also go public in this time frame but has expressed some hesitation recently, possibly due in part to the recent rocky post-IPO price path of SpaceX). There’s the pure AI play, a company without non-AI legacy baggage like Microsoft or Amazon. Funds will be needed for these investments as well.

Anthropic’s looming presence is not just a funding redirection story, but also a manifestation of a talent war. Yet another sub-narrative this week was the announcement by Alphabet of some key personnel departures, including members of some of its most high-profile AI projects who have decamped for Anthropic and OpenAI. The competition for talent in the AI space is intense, and Alphabet’s losses in this area are seen as key factors in the decline of about seven percent in the company’s stock this week.

A Pandora’s Box of Open Source

But there are yet more complexities to the story for investors weighing the merits of pure play investments in Anthropic and/or OpenAI. China’s DeepSeek briefly knocked established AI names for six last year when it launched what appeared to be a competing platform on par with ChatGPT but much more cost-effective. Now DeepSeek is ramping up its latest models and benefitting in part from cheaper energy sources powering its data centers in Inner Mongolia. Other model developers in China and Japan are touting the benefits of open source systems, which could ultimately throw a wrench into the business models and price projections of the established US players.

All of which is to say that the AI story is vastly more complex than it was a year ago, and chances are that it will be more complex still a year from now. The complexity is breeding uncertainty, and uncertainty is showing up in the very volatile day-to-day price movements in this sector. The fundamentals remain strong when we consider the traditional metrics of growth, profitability and asset quality. But we can safely say that the days of simply buying the Magnificent Seven and buckling in for the ride are over.

Anyone who had been paying attention to the US monetary policy conversation in the past few weeks knew, within a very tight margin of error, what was actually going to happen at this week’s Federal Open Market Committee meeting. Nothing, as in, no change to the current Fed funds target rate range of 3.5 – 3.75 percent. Yes, but what was the new chairman of the Fed, Kevin Warsh, going to say about the decision to do nothing? What were the vibes going to be? How would this FOMC meeting be different from every other FOMC meeting? Well, we got answers to all those questions and more.

The War on Excess Verbiage

The first clear sign of the new sheriff’s handiwork came precisely at 2:00 pm Eastern time, with the publishing of the FOMC statement. Those of us who have been reading these statements for years on end did a collective double-take upon countenancing the abrupt change in style, format, content and (especially) length of this statement from previous FOMC releases. In the past, these documents changed very little from meeting to meeting, typically running in the neighborhood of 350-ish words and using lots of tendentious filler language like “in assessing the appropriate stance of monetary policy” to lead the reader to the substance of what was happening. By contrast, yesterday’s statement came in at a terse 132 words, did away with just about any word that did not absolutely need to be there, and entirely did away with any language that could be interpreted as forward guidance, i.e., suggestions as to whether the Committee was leaning towards easing or tightening as it looked ahead. “Here’s what we did today. See you in six weeks” was the blunt substance of Wednesday’s report.

Dot Plots for Thee, Not for Me

The second item of note was the Summary Economic Projections – the fabled “dot plot” containing the Committee members’ best estimates as to where the Fed funds rate might be headed in the months and years ahead. Given Kevin Warsh’s well-publicized dislike of any kind of forward guidance, the fact that there actually was a dot plot was itself a revelation. But it was missing one dot, because Warsh himself declined to provide his own estimates. So the number of dots fell from 19 to 18. The subject came up at the post-meeting press conference, in which Warsh managed to simultaneously support his colleagues’ continuation of the dot plot guesses and convey his own belief in the silliness of the exercise.

There is a certain logic to his thinking. The world is going through substantial changes on many fronts – socially, economically, geopolitically – and today’s best guess about interest rates is likely to be upended by the events that unfold tomorrow. Back in March, the median (out of the 19 separate estimates) for where the Fed funds rate would be at the end of 2026 was 3.375 percent, implying a rate cut from the current level. Those estimates were made just shortly after the war in the Middle East had begun. Yesterday’s dot plot produced a median estimate of 3.875 percent, implying the likelihood of a rate hike this year. Nine out of the 18 Committee members providing estimates expect a rate hike. But that is as of today. Who knows what that will look like in six weeks when the FOMC meets next?

And that is the core of Warsh’s argument against forward guidance. In an environment of rapid change and high uncertainty, best guesses about the future are likely to have very limited usefulness as a predictive mechanism. The case against Warsh, though, is that this exercise of forward guidance provides transparency into the Committee’s thinking. A regular diet of Fedspeak, through the SEP as well as the frequent public events in which Committee members share their views with members of the public, can also help shape a consensus for markets, with the potential for fewer surprises that catch investors off guard and result in wilder price swings.

The Times Are A-Changin’

How is all this going to translate into, not just a change of style at the Fed, but of substance as well? We will know more about that later this year. At the post-meeting press conference, Warsh unveiled plans for five new task forces to address a wide range of issues, from communications to data sources, the Fed balance sheet, productivity, inflation and the jobs market. He expects to have many of the findings from these task forces ready by the end of this year. Reading between the lines, some of those findings are likely to result in significant changes to the Fed’s current communications practices (quite possibly the end of the dot plot era), more insight into possible relationships between inflation, jobs and artificial intelligence, and even questions about the specific metrics used for data insights, such as the core Personal Consumption Expenditures index as the Fed’s preferred inflation gauge.

The Warsh Fed, in other words, is likely to look very different in meaningful ways from the somewhat abstemious collegiality of the Bernanke, Yellen and Powell Feds. But on one other important matter Warsh very capably, in our opinion, established his commitment to the independence of the central bank. Anyone who thought he was going to come in as a paid spokesman for the White House with a sweeping push for easy money will have been swiftly disabused of that notion. Markets were, in fact, a bit taken aback by the discernable hawkish sentiment, not just in the higher dot plot estimates for the Fed funds rate but in Warsh’s oft-repeated comments during the press conference about the primacy and urgency of bringing inflation under control.

So concerns about an imminent loss of central bank independence can, we believe, be pushed off the list of top-level worries. It remains to be seen whether all these forthcoming institutional changes to the Fed will be for better or for worse. For now, we are inclined to give the benefit of the doubt to the new sheriff in town. Institutional change is hard, but sometimes change is necessary for the institution to maintain strength, integrity and relevance. We will be watching these developments closely as they unfold.

As of this past Wednesday’s market close, the S&P 500 had retreated by around 4.5 percent from its recent all-time high, set on June 2. The Nasdaq, home to a bevy of the AI-related names central to the market’s fortunes this year, had given up 7.1 percent from its most recent high water mark. There’s nothing particularly unusual about a drawdown of these magnitudes after a sustained run upwards. We make a note of every time the S&P 500 loses five percent or more followed by a recovery of at least that much, something which has happened 90 times since the beginning of the twenty-first century.

As always there are multiple factors at play. Stretched valuations have caused another round of second-guessing on the AI narrative, as we discussed in our commentary next week. The SpaceX IPO and subsequent (expected) debuts by Anthropic and OpenAI could add more third-guessing and fourth guessing to this space, with near-term risks both to the upside and downside. What concerns us more broadly, though, is the specter of inflation that has been looming over everything for the past several months. On Thursday the European Central Bank became the first of the G7 central banks to raise interest rates following the recent cycle of monetary easing, citing higher inflationary risks and also revising its growth estimates down. That sets up a challenge that the Fed will face when the FOMC meets next week.

Shades of 2022

The stock market has been impressive (some might say complacent) in its efforts to ignore that the war in the Middle East is still going on, three and a half months after it started, without an obvious path to conclusion. Investors do seem to have wised up enough, though, to stop engaging in rapturous cartwheels every time Axios comes out with yet another “deal is just around the corner” headline. Inflation had been sticky before the war started, but it has since gone from sticky to uncomfortably higher.

Energy, of course, has been the main influencing factor pushing prices skyward as both the headline consumer price index (CPI, in green) and producer price index (PPI, in crimson) show. But core CPI (blue), which excludes energy as well as food prices, has also trended up since the war started. Producer (wholesale) prices in particular are rising by more than any time since 2022-23, at the peak of the post-Covid inflationary spike. Higher energy prices mean higher input costs for pretty much any business, and either those costs will get eaten by the business itself (lower profit margins) or get passed onto the consumer (higher prices for you and us).

It could be worse. Oil prices, while higher than before the war, are lower than some of the worst-case scenarios being spun after the Strait of Hormuz closed, which had crude oil prices pushing up past $150 per barrel. That hasn’t happened for several reasons, including a dramatic decrease in oil imports by China, which has been relying on other sources including inventories and alternative energies to meet its needs. But the longer the war persists, the more households and businesses will build higher inflationary expectations into their budgeting plans. Once these expectations become structural, they are very hard to dislodge – this is how inflation turned into a decade-long problem in the 1970s.

The Jobs Puzzle

But inflation is not the only macro variable putting pressure on the near-term outlook for stocks. Last Friday’s jobs numbers went over like a lead balloon. Meaning, of course, that the BLS report itself was upbeat, with 172,000 nonfarm payroll gains versus 100,000 expected, and the unemployment rate staying put at 4.3 percent. This was one of those time-honored “good news is bad news” events, as the Fed is even less likely to take a dovish position on rates when conditions in the labor market are healthy.

But are things actually all that great for jobs? Layoffs keep happening in large numbers. The May report on layoffs by Challenger, Gray and Christmas was up 16 percent from April and the highest number of layoffs for any May since 2020 (when pandemic-related layoffs were in full swing). The job market for recent college graduates is in terrible shape, with AI-generated resumes getting ghosted by AI hiring algorithms and nary a human to be found in the process. So far the evidence is anecdotal, but some concerning signs are evident. Additionally, the upbeat BLS May jobs report is thought to be due in no small part to one-off hiring in areas like hospitality and leisure ahead of the World Cup, which began this week.

So, we have lots more questions than answers. Again, we see the potential for near-term risks skewing either up or down. Uncertainty can cut both ways. But inflation seems set to remain a problem, potentially beyond the rest of this year, and we would very much like to be proven wrong on this front.

You would have needed a pole vault to get over that bar. The expectations bar, that is. On Wednesday after the market close, US chipmaker Broadcom released its sales and earnings report for the second quarter (second fiscal quarter, corresponding to the first calendar quarter ended March 31). Broadcom’s sales rose 48 percent year-on-year, and the company’s forward guidance for the quarter to come topped consensus estimates. The Palo Alto-based chipmaker is smack in the middle of the hottest story – arguably the only story – driving US stock market growth this year. Pretty good results, one might have thought.

But one would have been mistaken, at least in the context of what occupies the mind of the market. Broadcom shares plunged more than 12 percent yesterday, one of the biggest single-day losses on record, as investors apparently decided that even though the forward estimates beat the median forecast, they didn’t beat the most optimistic estimates. The freefall is continuing in the early hours of trading today, and the stock is now around 17 percent off where it started yesterday.

Here We Go Again with Productivity

The eye-popping magnitude of the Broadcom drop notwithstanding, the context around it is something we have seen time and again ever since OpenAI introduced ChatGPT to the world back in the latter months of 2022. Every now and then, the furious pace of investment in AI infrastructure and compute – the so-called “tokens” that are the basic units of AI brainpower – has been popped by a counternarrative questioning whether all this money was ever going to produce something genuinely productive and business-enhancing for its end users. There was a Goldman, Sachs research piece asking that exact question all the way back in the summer of 2023. Last year we had an MIT report in which 95 percent of companies using generative AI in some form claimed that their pilot programs were not delivering a clear financial return. And just last week, the chief operating officer of Uber introduced “tokenmaxxing” to the large swath of humanity unfamiliar with that term, noting that it was increasingly difficult to justify the amount being spent on AI tokens relative to their measurable effect on productivity. Just in time, perhaps, to frame the debate into which that hapless Broadcom earnings report came out this week.

Another False Rotation?

Whenever the AI counternarrative manages to score a hit against the dominant momentum, the inevitable question comes into play: to wit, is this now the moment when all the dishwater-dull laggards come out from behind the rocks and take charge? A look at recent history would suggest caution when debating whether to go pedal to the metal on any such rotation, because they have shown themselves to be short-lived. The chart below shows the performance of low-volatility versus high-beta (beta is a measure of relative volatility) stocks for the past 14 years, going back to the beginning of 2012 (the ETFs shown here were incepted in the middle of 2011). We think the high-beta / low-vol comparison is better for this purpose than, say, the old metric of value versus growth, because the AI trade has been pretty much entirely a high-beta story, while the waters are a bit muddier in the value / growth differential.

As the chart shows – and what should probably strike you as intuitive – is that in periods where things go sour, those high-beta stocks can fall much farther. A brief China shock in 2015, rising interest rates in 2018 and 2022, and the initial Covid shock in March 2020 all depict such periods. But the recovery from each downturn has tended to be quick, and over the entirety of the period the performance gap is notable, with the high-beta index returning nearly double its low-vol counterpart. Makes sense, right? Higher risk needed to obtain higher returns (though that Finance 101 tenet has always had its share of challengers, which is how “low volatility” offerings got to be a thing in the first place).

We will not be surprised if the stocks affected by the latest AI blowback turn around in the very near future, given that – tokenmaxxing chatter aside – there isn’t much evidence yet of any meaningful reversal to demand for all things infrastructure and compute. The buy-the-dip impulse among punters seems to be more frenetic than ever these days. But we will continue to take the counternarrative seriously, too, because it really still is an open question as to how all of this translates into measurable productivity. And we have some potentially major structural disruptions ahead, with both Anthropic and OpenAI on track to enter the public markets in the coming months. Not to mention the unwieldly behemoth SpaceX, about which we will no doubt have to share our opinions at some point in the not too distant future, whether we want to or not. In other words – both the narrative and the counternarrative are going to require close scrutiny in the weeks ahead.

The American consumer is the stuff of legend. Resiliently spending her way through the best and the worst of times, the consumer is the iconic emblem, the longstanding growth machine of the great US economy, accounting for nearly 70 percent of total gross domestic product year in and year out. Small wonder, then, that economists and other students of the market closely follow the minutiae of consumer data, from retail sales to personal consumption expenditures to household sentiment surveys.

Struggling to Keep Up

Many of these data points have been holding up better than expected recently. But there are some growing signs of pressure that may bode for a troubled summer ahead. Data recently released by the New York Fed shows that 90-day credit card delinquencies for the first quarter of this year rose to just over 13 percent, the highest figure recorded since the immediate aftermath of the global financial crisis. The savings rate, meanwhile, has fallen to its lowest level since 2022. Other data show that a growing number of households are dipping into retirement savings and taking out more debt as they struggle to keep up with rising inflation. The inflation rate was sticky even before the war in the Middle East began two months ago, and it has been trending up steadily ever since.

In the above chart we see the surge in energy prices producing a jump in the headline Consumer Price Index (CPI, crimson line), but also the steady rise in the core Personal Consumption Expenditure (PCE) index, the Fed’s preferred metric (blue line) which excludes the food and energy categories, and the core CPI number (green line) for good measure. The core PCE index is at its highest level since 2023, and it suggests that inflation is now about more than just higher gas prices, but is starting to make itself felt in a wider range of goods and services. Consumers are very much aware of this. In the latest Conference Board Consumer Confidence index, published earlier this week, two-thirds of respondents said that they will be cutting back on spending in the next six months due to higher prices, with the biggest cutbacks coming in discretionary and big-ticket items.

The Fed’s Dilemma

Consumers aren’t the only ones concerned about higher prices. A bevy of Fedspeak this week reflected a growing sense among the nation’s monetary policy stewards that a continuation of the present inflation trend could make the next change in interest rates a hike rather than the long-awaited cut. Investors are already pricing in a likely rate hike of 0.25 percent by the first quarter of next year. When the Federal Open Market Committee reports next on June 17, we will see whether the market’s outlook is matched by the Summary Economic Predictions that will accompany the FOMC’s press release. As of the prior SEP, a couple months ago, the median expectation was still for two rate cuts this year. We do not think that assumption will hold. To add to the drama, this will be the first FOMC chaired by Kevin Warsh, and may be an indication of changes afoot as the new Fed chair attempts to make his mark on the proceedings.

We do not expect to see rates move either up or down at the June meeting. There is still much that we don’t know about how structural the current inflationary trend will be, or how long it will take for the disruptions caused by the crisis in the Strait of Hormuz to work themselves out. One encouraging sign from that Consumer Confidence report cited earlier was that households’ inflationary expectations, while elevated, did not rise measurably from the previous month. In the 1970s, it was the wage-price spiral driven by expectations that produced the structural inflation of that decade – a feedback loop that went off the rails until the dramatic monetary policy actions of the Paul Volcker Fed at the end of the decade. We are nowhere near those levels today, and hopefully we won’t be there tomorrow. Meanwhile, we will need to keep a close eye on the consumer-facing data as they come in over the coming weeks.

Nobody understands quantum mechanics. That’s according to the late Richard Feynman, and as one of the greatest physicists of the twentieth century, he was in a good position to opine on the subject. As mind-bendingly counterintuitive as the subject is, though, it is showing up in all kinds of technological spaces these days. Including the stock market. The chart below shows the two-year performance of three companies engaged in various approaches to the challenge of developing a quantum computer: IonQ, Rigetti Computing and D-Wave Quantum. That blue dotted line plodding along below these three companies is the S&P 500.

The Qubit of It All

The above chart reflects not just the eye-popping returns for these companies, but also the considerable risks involved for something that…well, doesn’t quite exist yet in a fully functional form. If you bought into Rigetti Computing two years ago, you would be up more than two thousand percent cumulatively. If your cost basis was October 2025, on the other hand, you would be down by minus 54 percent as of today’s prices —  good for tax loss harvesting against all your AI winners, maybe, but not much else.

So where exactly are we in this brave new world of computers powered by qubits? Unlike the ordinary bits that make up the building blocks of classical computers, each of which can take a value of either zero or one at a discrete point in time, qubits can exist in a so-called superposition of all states between those numbers at the same time. That should give quantum computers vastly superior performance over their classical peers in the run-time needed to solve extremely complex problems.

But getting these qubits to behave properly is a daunting challenge. A qubit works – for the purpose of quantum computing – when it is in that superposition state, but it only remains that way for a tiny fraction of a second. Adding more qubits to a system creates interference as individual qubits pop in and out of their fragile superposition states, creating an unwieldly amount of cross-talking noise. That makes it hard to scale up to a size commensurate with what would be considered a fully operational quantum machine. There is considerable debate among experts in the field as to when this scalability will be achievable – from a couple years from now to a quarter century or more away. That’s a pretty wide time gap.

All Roads Lead to Somewhere

Which of the various technologies being tried out today will get to that big milestone of an industrial-size quantum computer with acceptable levels of interference? Are we going with superconducting circuits, or trapped ions, topological qubits or other modalities that so easily roll off the tongue? Right now – as the above chart suggests – investors are casting their nets wide rather than going all-in on any one thing that may wind up a dead end. The parallels with artificial intelligence can be seen here, where a thousand flowers bloomed and faded in the world before ChatGPT (and arguably, that debate is not finalized either, as the race for less costly and energy-intensive systems with fewer hallucinations continues in AI land).

Steady progress is being made, though, and along with the potential benefits from quantum computing in areas such as drug discovery, there are plenty of threats. One of the first practical uses identified for a machine running on qubits was cryptography, or the ability to crack the most complex of security codes. That presents an obvious challenge to the integrity of cybersecurity systems. In today’s Financial Times, an article titled “Crypto industry braces for quantum threat” described how a post-quantum world could pose a lethal threat to the security of the code powering the blockchain, upon which the cryptocurrency bitcoin rests. As if we didn’t already have enough to worry about with AI hacking superpowers like Anthropic’s Mythos out there lurking around. Whether it’s two years or two decades, we need to be plugged into what is going on in the trippy quantum world, ready to take advantage of the opportunities and to take defensive actions against the threats.

May the odds be ever in your favor. That was the cynical sentiment expressed to those unfortunate souls selected for participation in the “Hunger Games,” the much-read and much-seen saga by author Suzanne Collins. With a 95.83 percent chance of death in that contest (23 out of 24), the odds were most definitely not in one’s favor. Now, Kevin Warsh did not come into his new post as chairman of the Federal Reserve through any “reaping,” as per the protocols of the Panem games in the fictitious series. This is, arguably, his dream job. Unfortunately for him, though, the state of the global economy today means that the odds are in his favor about as much as for some hapless tribune from District Eleven or wherever.

No Room for Rate Cuts

Warsh takes the baton from outgoing Fed chair Powell today (Powell will be staying on for the foreseeable future as a regular Board governor). This morning, bond yields jumped for a variety of reasons mostly linked to the persistence of high energy prices, with resulting upward pressure on consumer and producer prices, and the apparent lack of any kind of definitive action coming out of this week’s summit meeting between the US and China. The 30-year bond yield is at its highest level in recent history.

Bond market investors have taken stock of the inflation situation and concluded that there will be no interest rate cuts in 2026, with doubts even as to their likelihood in the first half of 2027. Core inflation, as shown in the chart above, remains well above the Fed’s target rate of two percent, a level last seen in 2021. Core inflation excludes the volatile categories of food and energy, thus not directly reflecting the spike in fuel prices since the beginning of March. But those higher energy costs eventually work their way into the broader economy, as seen in the chart above (the green line). Conditions are even worse at the wholesale level. The headline Producer Price Index (PPI) for April, as reported on Wednesday this week, came in at 6.0 percent year-on-year while the core PPI jumped to 5.2 percent. With the Fed’s mandate to maintain stable prices front and center, this is no environment for a rate cut.

Unfortunately for Mr. Warsh, he comes into the job with at least one extremely powerful individual expecting him to do just that. Trump is not exactly known for a keen appreciation for the judicious use of monetary policy to address the economic realities of a given place and time. In about one month’s time, on June 17, Warsh will be captaining his first Federal Open Market Committee meeting, marking the Fed’s first call on interest rates under his leadership. Now there is, of course, a non-zero possibility that conditions will change so much between now and then that a rate cut could be up for discussion. We would put the odds of that somewhere below the odds of emerging as the victor in the Hunger Games, but one never knows for sure.

Catching Fire

Kevin Warsh has a deep knowledge and sound understanding of how the economy works in all its component parts. At least based on much of his past record, he is instinctively a hawk when it comes to the task of managing inflation. More than his technical skills, though, he is going to need to draw on all his skills in the art of diplomacy to thread his way through the political expectations of the White House and the sober, technocratic analysis of his eleven fellow voting members on the FOMC. The traditional role of the Fed chair, when it comes to the FOMC, is to steer the members to a unified consensus on what action to take. His predecessors, for the most part, succeeded in that role (post-Arthur Burns, anyway).

On June 17 we will get to see whether Warsh has the diplomatic chops to produce a harmonious decision on policy without unleashing a firestorm of social media invective from down the street. Perhaps he should take some pointers from Katniss Everdeen, heroine of the Hunger Games who exuded diplomatic charm along with streetfighting smarts as she clawed her way through the tribulations of fending off her potential killers, those both in the arena with her and in the backstabbing halls of power in the Capitol. Good luck Mr. Warsh. Through your efforts and skills, we hope that the odds actually will be in your favor, sooner rather than later.

Ten years ago, in 2016, it was Great Britain that fired the opening salvo in what would come to be recorded as a very disruptive year in global politics. The decision to leave the European Union took place that summer as British citizens stuck it to the man – if only by a couple percentage points – and buckled in for whatever might or might not happen next. YOLO, as the kids were still saying back then. A few months later, Americans likewise flipped off the Establishment as they handed Donald Trump a presidential victory over Hillary Clinton, the living and breathing paragon of the establishment if ever there was one.

Dead and Buried

Here we go again. Election results for English council seats and the parliaments of Scotland and Wales are still being tallied, but enough of the vote has been counted so far to say that the results are a flat-out disaster for the two parties – Labor and the Conservatives (Tories) – that have dominated UK politics for the entirety of the postwar system. To the right of the Conservatives stands the Reform Party, an ethno-populist movement that is swallowing up the lion’s share of the votes being hemorrhaged by Labor and the Tories. As of this writing, with 63 of 136 councils determined, Reform has seen a net gain of 515 council seats while Labor is facing a net loss of 288 and the Conservatives a net loss of 204.

The Green Party, a left-leaning progressive movement, is also adding seats. Its leader, Zack Polanski, pronounced the two-party system “dead and buried” after the Greens won a crucial mayoral contest in Hackney, a borough in Inner London. The Greens are also expected to pick up their first constituency seats in Scotland, where the make-up of parliament is at stake with the overall winner expected to be the Scottish National Party, again displacing Labor. Similarly in Wales, the 30 year rule of Labor is set to end with just 10 or so of the 60 parliamentary seats with the national (Welsh) Plaid Cymru Party and Reform picking up much of the rest.

Relics of a Bygone Order

We decided to spend some time talking about the UK elections this week because we see this as part and parcel of the same phenomenon we were talking about last week, namely, the widespread and deep-seated disillusion being felt in so many households in so many parts of the world. Last week, you will recall, we highlighted the dismal numbers reflected in the University of Michigan household sentiment report – the lowest in 66 years’ worth of data. Well, we got the latest Michigan survey numbers this morning and they are even worse than the previous ones, for a second straight month of record lows. Dissatisfaction with the direction of consumer prices, anxiety about their future prospects and lack of trust in the country’s institutions are all in the mix. These are the same sentiments being reflected across the pond today as voters turn their back on the once-reliable two party system of an age gone by.

Here in the US we don’t have a parliamentary system, so voters aren’t able to throw their support into other parties that would have a reasonable chance to prevail in elections. In the UK, as in much of Europe, these other parties have long played a role as coalition partners when neither major party manages to win outright. But recent polls show a large and growing dissatisfaction by Americans with both of our major parties. Around 45 percent of all US voters now identify as independent, according to Gallup News. That’s the highest percentage since Gallup started gathering this data in 1988.

Defenders of this bygone relic of a system may look around them and wonder why anyone should care. Hey, we just got another respectable jobs report this morning from the BLS, with nonfarm payroll gains of 114,000 and a still-modest 4.3 percent unemployment rate. The economy is growing, companies are making scads of money and the stock market seems happy to clamber up whatever wall of worry is put in front of it. All true. But the economy still depends on people, and it depends on a stable political framework in which these people can operate. That framework increasingly appears to be under threat. Policymakers would do well to pay attention to what is happening in Hackey, and Edinburgh, and Cardiff, and figure out how to solve some of the things that are manifestly on the minds of the citizens they serve.

In the wonderful world of economic analysis we have hard data and soft data. These two things have been at odds with each other for some time, keeping those who try to supply insights and explanations about the data, ourselves included, asking why. We will try to come up with some answers as we delve into this topic today.

Let’s establish some basic definitions. By hard data we mean the numbers associated with macroeconomic performance metrics, the big three of which are arguably growth (GDP), prices for goods and services (inflation), and the availability of jobs (payrolls and the unemployment rate). Soft data, on the other hand, refers to surveys of sentiment and expectations among identifiable cohorts in the economy such as households, small businesses or multinational executives.

You could say that it’s a question of what they feel (soft data) versus what they do (hard data). Let’s look at one recent data point that has raised some eyebrows among those who follow these things. Here is the University of Michigan consumer sentiment index, with data gathered from households across the country going all the way back to 1960.

The Vibecession in Living Color

The most recent reading for the Michigan sentiment index, reflecting surveys conducted in March, has household vibes at their lowest level ever. Ever, as in lower than the 2020 pandemic. Lower than the great financial crisis of 2008. Lower than the stagflation of 1979 that led to 20 percent interest on car loans. You get the picture – lowest level in the past 66 years. When you hear financial pundit types talking about the so-called vibecession, this is what they are talking about. Now, to be clear, not every sentiment survey is quite as down-in-the-mouth as the Michigan one. According to the Conference Board’s Consumer Confidence Index, sentiment is currently about as bad as it was during the 2020 pandemic, but better than the dark days of 2008. That still gives one pause, though, given the general absence of a pandemic today.

Meanwhile in Hard Data Land

So, far though, the negative vibes are not showing up all that much in the macro hard data reports. Yesterday we got the first quarter GDP numbers, showing growth at a modest but still positive two percent (annualized) for the quarter. Consumer spending, which makes up close to 70 percent of total GDP, grew at 1.6 percent, a bit better than expected. Last week’s retail sales numbers for March also beat expectations, with headline sales up a healthy 1.7 percent. As far as jobs and inflation are concerned, they are not great and are moving in the wrong direction (unemployment and inflation both trending higher, which makes the Fed’s job in managing monetary policy very complicated). But a 3.3 percent consumer price index (CPI) and 4.3 percent unemployment rate are far, far from the most dire figures in either category. Worthy of a vibe-cooling, maybe, but not a vibecession.

There may be a simple explanation, though. Poring through levels of detail in consumer activity provides ample evidence of what economists are calling the K-shaped economy, with the bulk of spending being done by the wealthiest segment of society. To be specific: at present, according to many sources, about half of all consumer spending is coming from the top ten percent of consumers by income level.

Now, presumably when representatives of that top ten percent show up in the soft data consumer surveys, they are likely to be pretty happy with the state of things (at least as pertaining to their own material well-being). But the other 90 percent of households also feature in the surveys, and that’s where the hard-soft gap is likely to be situated. Simply put, their dissatisfaction as reflected in the Michigan survey and its ilk is more than compensated for in the hard numbers by the fact that the bulk of consumer spending is coming from elsewhere. To use a stock market analogy, you could say that the market capitalization of that top ten percent income bracket runs to half of the total market.

There may be more to it than this, and we will leave aside for now the thornier question of how sustainable this K-shaped arrangement is. But in trying to figure out what exactly is going on in this strange moment in which we are living, one has to pay attention to the hard and soft data alike.