Friday Thoughts
Boring Non-Equilibrium / Warsh Signals / Market Observations / New Dashboard Feature
Let’s face it as it is. The week has been boring and noisy, with no signal emanating from any of the macro drivers, except for equities. To the blunt eye, this could be seen as enthusiasm and projecting optimism. I think that take is wrong. It’s not driven by positive emotions, but fear.
I used the relatively uneventful week to prepare and sharpen my tools for the next unfolding macro narrative.
Yes, I listened to Warsh’s testimony, which was equally boring.
It was a lot of political theatre and not nearly enough substance. But beneath the circus, there were a few genuinely consequential macro signals that the market is only beginning to digest.
The Regime Change
Warsh laid out three pillars that would fundamentally alter how the Fed operates. First, the abandonment of forward guidance and the dot plot. He was explicit: when the Fed telegraphs its forecasts, policymakers cling to them longer than they should, compounding errors. He is right. A world without dots is a world with structurally higher rates volatility. The entire edifice of front-end pricing has been built around a reaction function that Warsh wants to dismantle.
Second, the balance sheet. He wasn’t shy — the nearly $7 trillion of holdings is an echo of past crises and needs to come down more aggressively. MBS in particular. Wall Street has already coined this “QT for cuts”: shrink the balance sheet, create room to cut the front end. The maths might work on paper, but the transmission is messy.
Third, and this is the one that should raise eyebrows: his claim that cutting rates wouldn’t do much to inflation had me laughing. Let that sink in for a moment. The incoming Fed Chair is pre-emptively building the intellectual case for why rate cuts are harmless. If that isn’t laying the groundwork for delivering exactly what Trump wants, I don’t know what is. He can reject the “sock puppet” label all day long, but when you’re already constructing the narrative that easing won’t stoke prices, you’re essentially giving yourself permission to cut without accountability. It’s the first real hint that Warsh might indeed end up being Trump’s useful instrument, wrapped in the veneer of academic rigour. The market should take note.
Front-End Weakness and the Curve
Was it a coincidence that front-ends started weakening and curves flattened around the hearing? I’d argue no. SFRZ6 below, exhibiting weakness around his testimony onwards.
The front-end sell-off makes intuitive sense. Warsh pushed back convincingly against the idea that he’d simply deliver rate cuts on command. The market had been carrying some residual expectation of a reflexively dovish Warsh Fed. That got repriced. If the next Chair isn’t going to cut immediately — and his pushback on independence was just convincing enough — then the front end needs more uncertainty premium, not less.
The flattening tells you something more subtle. The long end didn’t sell off in sympathy because Warsh simultaneously signalled that the Fed’s footprint in the bond market is too large and that balance sheet reduction is coming. In the near term, the market hears “fewer cuts, or at least not on command” at the front, while at the back, it hears “we’ll eventually stop suppressing term premium.” That’s your flattener right there.
But as I’ve written before, narratives usually change after prices have already manifested a view. The medium-term direction, once Warsh is actually seated, should logically be curve steepening as term premium rebuilds and QT bites. The current flattening may well be setting up the steepening trade once the dust settles and the man is in the chair.
The week has been good (as of Thursday night) for my overall positioning. The 2026 portfolio has reached new highs, now up 11.35% YTD, comfortably outperforming the SPX and NDX (see chart below).
I am sharing a few more macro thoughts behind the paywall further below.
The newly established site on pa-globalmacro.com has seen increased interest. As a reminder, it is the new dedicated home for all my models and technical signals, currently housing the dashboard, signals, and the full chart book, spanning the entire global macro universe, from rates and FX to crypto and single-name stocks.
Paying subscribers have exclusive automatic access to all current features, and there is more in the pipeline.
A new feature, available immediately, allows you to subscribe to automatic email updates once the dashboard and signals have been published.
All you have to do is log in using your email (same as for Substack) and toggle on the email preferences. Job done, and you will get the dashboard and signals straight to your inbox daily.
Let’s now dig deeper into some of my macro observations, before we then also hear from Macro D on his latest thoughts on the ECB and markets.
I’m very proud of myself for having typed that far without having mentioned the war once. Amazing, but sadly, it seems far from over. I have some thoughts on it below as well.
Have a peaceful and joyous weekend.
