CPI Shock, Warsh Sworn In, and a 45 Percent Hike Bet

The Week's Big Idea

When the Pricing for "No Cuts" Becomes Pricing for "Hikes"

A month ago, market-implied probability of a Fed rate hike in 2026 was essentially zero. After this week, it is 45 percent. That move did not happen because of any single number. It happened because three things stacked: CPI accelerating, PPI surging, and the Iran de-escalation hope collapsing on Friday. None of these in isolation would have been enough. Together, they forced an entire rethinking of the policy path. This is what regime shifts look like in real time. They do not announce themselves. They show up first in the curve, then in cross-asset correlations, and only later in headlines.

Why it matters: when "higher for longer" turns into "potentially higher still," the assets that suffer most are usually the ones that ran the hardest on the previous narrative. Watch tech and gold positioning closely.

A round trip. The Dow reclaimed 50,000 on Thursday for the first time since February, driven by Cisco's earnings beat and optimism from the Trump-Xi summit. By Friday's close it was back near 49,526, finishing essentially flat on the week. The S&P 500 and Nasdaq printed fresh records mid-week before sliding more than 1 percent each Friday. The signal underneath: profit-taking concentrated in the AI complex (Nvidia -4.4 percent, AMD -5.7 percent, Micron -6.6 percent, Intel -6 percent on Friday), with broader market breadth deteriorating. Six straight winning weeks ended this week, though indexes still closed marginally positive.

Price action suggests: a market at record highs that is showing the first cracks. When narrow leadership reverses sharply, it usually does so before the broader index does. Watch whether the rotation finds new leadership next week, or whether profit-taking spreads.

Gold gave back last week's gains and then some, falling roughly 4 percent on the week to close around $4,530. This is the second time in three weeks that the metal has been clobbered by what should, on the textbook, support it: a hot inflation print plus geopolitical tensions back on the rise. The reason gold fell anyway is the same as it has been all year. Real yields are pushing higher, the dollar is strengthening on hike-bet repricing, and the opportunity cost of holding a non-yielding asset has gone up sharply. The 10-year Treasury hit a one-year high near 4.55 percent on Friday. The 30-year crossed 5.1 percent for the first time since 2023.

Price action suggests: a broken short-term structure pressing against the long-term consolidation floor near $4,400 to $4,500. A weekly close below that zone would be a meaningful structural break; a hold there preserves the broader range.

Oil reversed last week's drop and then some. WTI climbed from around $95 to roughly $104, a gain of close to 9 percent on the week, with Brent crossing $108. The catalyst was Friday's news: Trump's China summit produced no progress on the conflict, and the President signaled his patience with Iran was running out. The market that was pricing the optionality of a Hormuz reopening last week is now pricing the optionality of further escalation. The $95 to $105 range I mentioned in last week's letter held its top and its bottom, but the move from bottom to top happened in a single week.

Price action suggests: a headline-driven market with extreme realized volatility but a fairly defined range. Until either Hormuz reopens or escalation goes beyond the current pattern of skirmishes, the $95 to $108 zone is likely to keep defining the trade.

The euro lost ground throughout the week as the dollar's hike-bet repricing pushed broadly. EURUSD slipped from the 1.1730s into the lower part of its recent range. The dollar index is set for its biggest weekly gain in two months, driven by Treasury yields hitting one-year highs. Underneath, the ECB still has its "scenarios for hikes" framing intact, but as long as US real yields move faster than European real yields, the rate differential continues to do most of the work in this pair.

Price action suggests: the upper range that held for weeks is now under pressure. A failure to reclaim 1.1730 to 1.1750 keeps the pair biased lower toward the bottom of its range.

Cable traded heavily this week. UK 10-year gilt yields jumped another 15 basis points on Friday, putting them near 20-year highs. The combination is unfriendly: gilts are selling off not because of growth optimism but because of fiscal concerns and political uncertainty after recent local election results. When a currency weakens while its government bonds also sell off, the market is sending a real-economy warning sign about that country's policy mix, not a constructive growth signal.

Price action suggests: sterling is now reflecting UK-specific risk as well as broad dollar strength. Watch UK CPI and any further political headlines for the next directional cue.

USDJPY climbed for four straight sessions and finished the week up more than 1 percent near 158.5. The yen has now given back roughly half of the gains from Japan's intervention rounds at the end of April. The structural pressure that triggered the interventions has not changed: Japan still imports its energy, oil is back above $100, and the US-Japan rate differential is widening as US hike bets rise. The BoJ's April minutes hinted that further rate hikes are being debated as early as the next meeting, but the market is not pricing that yet. The 160 level is the policy ceiling. If we get there again, expect another round of intervention chatter.

Price action suggests: a slow grind back toward the intervention zone, with policy risk getting denser the closer we get to 160.

USDCAD continues to confuse the textbook trader. Despite oil rallying 9 percent on the week, the Canadian dollar barely strengthened against the US dollar. Broad-based USD strength on the hike-bet repricing is overwhelming the petro-currency channel for the second straight week. The Bank of Canada is also viewed as more dovish relative to the Fed under Warsh, widening the implied rate differential. The pair stayed range-bound but with a clear upward bias by Friday's close.

Price action suggests: the rate-differential story is winning over the oil story. If US yields hold at one-year highs while BoC remains dovish, the pair has room to push higher even with oil elevated.