Warsh's throwaway comment injects life into the debasement trade, for one day at least

By Steve Goldstein

US Federal Reserve Chair Kevin Warsh, at least for one day, revived a popular trade.

As much as new Fed Chair Kevin Warsh tried to refrain from steering markets, it looks like he did.

At the European Central Bank forum in Sintra, Portgual on Wednesday, Warsh said inflation expectations and inflation risks have come down over the last four weeks.

"Markets latched onto his comment that 'inflation risks have come down,' even as he reiterated his commitment to price stability," said strategists at Deutsche Bank, led by Henry Allen.

Gold (GC00)rallied by 1.1%, a notable move given the S&P 500 SPX declined on Wednesday and the close correlation the two assets have seen over the last two months. Bitcoin (BTCUSD) also gained ground.

The Treasury curve steepened, as the yield on the 10-year Treasury BX:TMUBMUSD10Y rose faster than that of the 2-year Treasury BX:TMUBMUSD02Y.

JPMorgan's trading desk said the Warsh comments were enough for the "debasement trade to roar back."

The debasement trade, in vogue last year, is the strategy that holds that the dollar will weaken in value, while so-called hard assets, like gold that cannot be printed by a central bank, will rise. It helped propel gold beyond $5,000, a level the yellow metal hasn't enjoyed since March.

Granted, the reason inflation expectations have come down is that oil prices have fallen after the U.S.-Iran memorandum of understanding reopened Strait of Hormuz tanker traffic.

"The problem is that inflation is not just an energy story. It has broadened into goods through AI-related bottlenecks and services, supported by a stronger labor market," said Sonu Varghese, chief macro strategist at the Carson Group. "So, holding rates steady may not be restrictive enough for the inflation problem now in front of the Fed."

-Steve Goldstein

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07-02-26 0508ET