MSX US Stock Daily Observations: Walsh's Hawkish Opener Rescinds Rate Cut Expectations
- Core Thesis: New Fed Chair Walsh downplayed the June CPI cooling data with a hawkish stance, emphasizing "zero tolerance" for inflation. This caused market rate cut expectations to quickly recede, reinforcing the "higher for longer" interest rate narrative.
- Key Elements:
- The June CPI fell to 3.5% YoY, with the Core CPI at 2.6%. Both were below expectations but remain above the 2% target.
- During his congressional testimony, Walsh outlined five key issues: He was hawkish on inflation and monetary policy, neutral on independence and reform, and only dovish on AI.
- Market pricing suggests the July FOMC will hold steady, shifting the focus of a potential rate hike to September (with roughly 60% probability). The implied probability of "zero rate cuts" through 2026 is around 80%.
- With oil prices returning above $80 and coupled with Walsh's hawkish remarks, the market quickly retracted the rate cut expectations that had been building.
- The core view is that a softer CPI meeting a hawkish chair results in "cooling doesn't mean cutting." Attention now turns to the July 30th PCE data and major tech earnings.
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Today's Observation:
Newly appointed Fed Chair Warsh testified before Congress for the second consecutive day. Although the June CPI unexpectedly cooled significantly earlier that morning, he set a distinctly hawkish tone, expressing "zero tolerance" for inflation, downplaying single-month data, and abandoning forward guidance. Coupled with oil prices rising back above $80, the market quickly withdrew its once-heated expectations for rate cuts.
Data in One Minute:
• June CPI fell to 3.5% year-over-year (previous: 4.2%), core at 2.6%, both below expectations but still above the 2% target
• Warsh's stance on five major issues: hawkish on inflation and monetary policy, neutral on independence and reform, only dovish on AI
• July 28-29 FOMC: Market bets on "holding steady," rate hike focus shifts to September (~60% probability)
• Implied probability of "zero rate cuts" in 2026 is approximately 80%
MSX View:
We believe that a slightly soft CPI meeting a new hawkish chair results in "cooling does not equal rate cuts." Warsh wants to see inflation actually return to target, not pivot based on one or two months of good data, further reinforcing the "higher for longer" stance. For US stocks, this puts short-term pressure on high-valuation growth stocks, but strong earnings can still hold the line. The real inflection point lies in the July 30 core PCE data and the subsequent mega-cap earnings reports: the "second episode" of policy will be written by the data.
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Risk Disclaimer: The macroeconomy and US stock market are highly volatile. This content is for academic and research observation purposes of the MSX Research Institute only and does not constitute any investment advice.
