The Overnight Report: A Surprisingly Hawkish Fed

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US markets retreated as new Fed Chair Kevin Warsh and other Fed members opened the door to future rate hikes in the US.

The Treasuries yield curve flattened, as the short end rose, a bearish signal for risk assets.

After a fourth positive session for the Australian market yesterday, ASX200 futures are pointing to a negative start on Thursday morning.

Good Morning,

On Wednesday, the Australian market lifted for a fourth consecutive session, with the ASX200 rising 49 points or 0.5%, closing at 8,966.

Technology, which has lagged over FY26 was the top performer, up 2%, while energy declined by -2.3%.

Today’s Big Picture, J.L.Bernstein

The Fed Turned Hawkish

Rates held steady on a unanimous vote.

The real news was the forecast: nine of eighteen officials now expect a hike this year, after most of them saw cuts coming back in March.

Warsh didn’t submit his own dot and kept circling back to one idea in the presser, that the Fed will get inflation to 2 percent.

Trump picked him to cut. Day one, he leaned the other way.

Stocks Sold the Fed News

That morning record was gone by the close.

Stocks dropped, yields and the dollar pushed up, and gold and bitcoin both gave ground, so cash was about the only thing working.

The selling picked up once Warsh started talking, and traders now see a December hike as the base case.

Chips were the lone group in the green.

Oil Keeps Sliding

Crude sat near three-month lows, and supply is the reason.

The IEA now expects the world to pump more oil than it needs by 2027, assuming Gulf output comes back online.

The US-Iran deal still gets signed Friday.

Watch this one closely, because cheap oil is what could eventually pull inflation down and take the hikes off the table.

NAB Markets Today extract

Markets broadly treaded water for most of Wednesday, awaiting both the anticipated signing of a US-Iran deal in Switzerland on Friday and the outcome of US Fed Chair Kevin Warsh’s first FOMC meeting and press conference. 

Markets have reacted violently to what they read and heard from the Fed. US 2-year yields ramped 14bps to 4.19% in a move that was all about the front-end and a repricing of US rates.

Prior to the Fed meeting, October 2026 was priced around 12bps or almost 50% probability of a Fed hike, and now  it is 28bps, with two hikes more-or-less priced by March, 2027. 

Longer-term yields rose much less, with US 10-year yields up 4 to 5 bps. Stocks, which were modestly higher into the Fed closed down over -1%, with the S&P500 down -1.2% and the Nasdaq off -1.3%.

The USD rose across-the-board, with the DXY up 0.9% to almost match its highest narrow-trade-weighted level since May 2025. The AUD slipped -0.7% to 0.7010, the NZD fell -0.85% to 0.5770 and the EUR fell -0.9% to 1.15, dipping to 1.1479 at one stage.

There are several notable points from the Fed. The 2026 median dot was raised to 3.75% from 3.375%, with 2027 now at 3.635% from 3.125%.

As speculated on in the media, Fed Chair Warsh chose not to provide his own set of dots. The Fed’s latest Summary of Economic projections (SEP) that comes once a quarter, raised core PCE forecasts for 2026 to 3.3% from 2.7%, with 2027 at 2.5% from 2.2%. 2028 was 2.1% from 2%.

GDP growth was cut from 2.4% for 2026 to 2.2%, with 2027 at 2.3%, unchanged and 2028 at 2.2% from 2.1%. Unemployment for 2026 was lowered to 4.3% from 4.4%, unchanged at 4.3% in 2027 and 4.2% in 2028.

The new-style Fed statement was very short at 131 words versus the 341 words of the prior statement. Chair Warsh said it was, ‘a bit shorter, a bit simpler and just gives you the facts.’ He said, ‘absent was the forward guidance, which we agreed is not suited to the current situation.’ 

The statement described economic activity as ‘expanding at a solid pace, despite elevated uncertainty that owes, in part, to the conflict in the Middle East’. It went on, ‘productivity growth and capital investment are strong. Job gains have kept pace with the workforce and the unemployment rate has changed little.’

The Statement said, ‘inflation remains elevated relative to the Committee’s 2 percent goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy. The Committee will deliver on price stability.’ While there is no suggestion the Fed’s dual mandate has shifted away from unemployment as well as price stability, markets have been left with a view the emphasise appears to have shifted to the latter for now.

It has been clear Warsh would like to reform the Fed, what has not been clear, is how quickly he would strike. It now very much looks like a new Fed chair for a new Fed era, with Warsh announcing a five-point ‘task force’ of experts to look at key areas of the Fed balance sheet, communications, productivity and jobs, data sources and inflation frameworks. 

Warsh said he hoped the task forces to conclude by the end of the year but was non-committal on the date. He said the task force was ‘central to the broad conduct of monetary policy.’

For all the hawkish vibes, Warsh did note when he reviewd the dots of other Fed members, he spotted they were in pencil, ‘the type with an eraser’ he said, suggesting that things are changing fast and perhaps confidence is not high.

US retail sales data for May were robust with headline sales rising 0.9% m/m, beating a consensus estimate of 0.6%, with April’s 0.5% revised down to 0.4%.

Ex-transport sales rose 0.8% m/m, also above a 0.6% estimate and with no revision to April’s 0.7% outturn. The control group measure of sales rose 0.7% m/m, above a forecast of 0.4%, also with no revision to April’s 0.5%.

In the UK inflation for May was lower than forecast at the headline and core level, but higher for services prices. Headline inflation was unchanged at 2.8% y/y, below a consensus forecast of 3%. Core inflation was 2.6%, also below a consensus forecast of 2.7%, up from 2.5% in April. Services inflation jumped from 3.2% to 3.7%, above economist estimates of 3.6%.

Final EZ HICP inflation for May revealed the headline rate to be unchanged at 3.2% y/y, in line with a preliminary reading but up from 3% in April. Core HICP however, was revised up from a preliminary reading of 2.5% to 2.6% and from 2.2% in April. Services inflation stayed at 3.5%, up from 3% in April. Non-energy industrial goods prices rose 0.9% y/y from 0.8% in April.

The Swedish Riksbank left rates unchanged as expected at 1.75% and said it expected the policy rate to average 1.76% in Q3 vs 1.7% back in March. 

Fed review: As committed as ever, Danske Bank 

Kevin Warsh set the tone for a new era of forward guidance (or lack thereof) as the Fed published an aggressively shortened statement with focus on only three main messages: policy remained unchanged today, the Fed remains committed to maintaining ample reserves and the committee will deliver price stability.

The final point was in focus during the press conference, as Warsh firmly refrained from speculating about the future, and instead underscored that the Fed’s commitment to bringing inflation down to 2%.

Warsh did not submit his personal ‘dots’ but encouraged the rest of the committee to continue doing so.

The updated rate projections signalled an even clearer shift towards a hiking bias than we envisaged in our Fed preview, 16 June.

Only one participant called for a rate cut this year, 8 called for unchanged rates and 9 called for 1-3 hikes.

Median dots for 2027 and 2028 were lifted by 50bp and 25bp respectively. GDP and unemployment rate forecasts remained little changed, but inflation forecasts were revised higher (core PCE 3.3% in 2026, from 2.7%) — in line with our expectations.

The committee saw risks surrounding the GDP and labour market outlooks as balanced (prev. skewed towards weaker conditions), 17/18 participants saw core inflation risks skewed to the topside, also in line with our expectations

Warsh did not specify whether FOMC will continue submitting ‘dot plots’ going forward. Instead, he announced five ‘task forces’, which will evaluate the central banks’ communications, balance sheet policies, data sources, productivity and the inflation framework going forward. Timeline for changes is by year-end.

We maintain our forecast for two Fed hikes over the next year, in December and March. 

We see risks skewed towards an earlier start to the hikes, potentially in September, if macro data continues to come out stronger than expected.

We expect the Fed to continue expanding its balance sheet with reserve management purchases of T-bills at a monthly pace of roughly USD10bn in the foreseeable future. 

The Shot Across the Bow, Stephen Innes, SPI Asset Management, extract

The Fed did not hike rates, but it did something more dangerous for a market that had been leaning the other way. It made hikes believable again. That was the shot across the bow.

Not a cannon blast, not a policy detonation, but enough smoke off the bow to make every crowded risk position look down at the waterline and check whether the hull was still intact.

The decision itself was uneventful. But markets do not trade the headline decision alone. They trade the message, the reaction function, and the gap between what investors thought they had priced and what the central bank just forced them to reconsider.

On that score, Warsh did not move the policy rate. He moved the weather. The Fed left the anchor where it was, but changed the tide around every boat in the harbour.

The bigger message came from the dots. Nine Fed officials now see at least one hike this year, six see at least two, and another nine expect either no move or a cut. That is not a clean consensus in hiking, but it is enough to change the market conversation.

This was not really about whether the Fed hikes in July, September, or October. It was about the bar. And the bar for a hike has clearly moved lower than the market wanted to believe, while the bar for a cut has moved higher.

That is a nasty combination for risk assets sitting on rich valuations and depending on the old assumption that policy relief was somewhere over the horizon.

The debate now shifts to whether this is the opening act of a real hiking cycle or simply a warning flare designed to keep financial conditions tighter without the Fed having to fire the first shot.

The Fed can still avoid hikes if inflation cools quickly enough, but the corridor has narrowed, and every incoming inflation print now carries more market voltage. A softer oil price helps, but it is not a master key. It may cool the headline temperature, but it does not unlock the door to cuts on its own.

The next move could still eventually be lower, but only if the data gives the Fed enough breathing room to step back from the inflation ledge. Until then, the bar for a hike has moved lower, and the bar for a cut has moved higher.

That is exactly how a hawkish hold is supposed to work: no policy move, maximum market repricing. The Fed did not pull the lever. It changed the weight sitting on it, and every risk asset felt the pressure shift.

Corporate news in Australia:

• MResources wins auction for Tahmoor coal operations
• Bain Capital has exited the sale process for oOh!media ((AFR)) following its review, leaving three remaining bidders in contention
• Expert360 has been put up for sale, with advisers seeking strategic buyers for the AI-enabled talent marketplace
•  Jefferies has been appointed to run the sale of Sydney-based defence and aerospace electronics manufacturer Circuitwise
• Morningstar has endorsed IFM Investors’ $5.10 per share bid for Atlas Arteria ((ALX)), arguing weak fundamentals and governance risks limit upside for investors who reject the offer
• Novonix ((NVX)) has launched a $20.7m capital raising at a -33% discount following a -57% decline in its share price
• ASX Ltd ((ASX)) is tightening takeover rules by limiting share issuance to 25% without shareholder approval
• Stack Infrastructure is preparing a potential sale of its Asia-Pacific data centre portfolio valued at around $30bn, with early interest reportedly emerging from investors including GIP and IFM Investors
• FDC Construction’s proposed ASX listing is gaining momentum at a valuation of $950m-$1.1bn
• SpaceX’s proposed IPO has generated record interest from Australian retail investors, with more than 28,000 applications reportedly lodged through CommSec
•  La Trobe Financial has attracted renewed acquisition interest at a valuation of around $3bn

On the calendar today:

-NZ 1Q GDP

-AU May Unemployment

-UK April Earnings

-UK April Unemployment

-UK BoE decision

-US Jobless Claims

-AFT PHARMACEUTICALS LIMITED ((AFP)) ex-div 1.62c

FNArena’s four-weekly calendar: https://fnarena.com/index.php/financial-news/calendar/

The Australian share market over the past thirty days…

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