Weekly Newsletter: February 2, 2026
Kevin Warsh is the current “best looking” shirt in the laundry. While he still needs to survive the heat of confirmation hearings, he has been tabbed as the next Federal Reserve Chairman, succeeding Jerome Powell when his term ends in May. Speculation is already at fever pitch as to what he could mean for the direction of monetary policy. Will he shrink the balance sheet? Will he keep rates higher for longer to slay inflation? Will he cut rates to appease Trump, who appointed him? Having already been on the Federal Reserve Board from 2006 to 2011, he has more experience in the “workings” of the Fed than the other candidates. His views on monetary policy will be important. However, he is but one vote on a Fed that is showing signs of disagreement on policy. The economic data will also have a “say” about the direction of monetary policy, so decisions will not be made in a vacuum. Friday’s nomination overshadowed the current Fed’s rate decision to leave things alone. At the press conference that followed, current Chair Powell deferred all comments about the next chair and what he would do when his term expires. The decision to leave rates alone is likely a nod to better-than-expected economic growth and a stable labor market, as neither needs monetary help at this point. Inflation remains a bit pesky as producer prices came in above expectations. Clearly, the Fed’s job is not yet done on inflation.
The producer price report, among the last of the “catch-up” reports from the government shutdown, showed food and energy prices declining. Nevertheless, prices for services were rising. The impact of tariffs should have been felt in good pricing, so the higher prices for services were a surprise. The categories within producer prices tend to be very volatile from month to month, so it is better to look at year over year numbers, which do show some moderation in inflation, down to 3% from 3.5% in 2024. The key here will be how inflation reacts to higher economic activity. The Chicago Purchasing Managers Index rose to an “expansion” phase for the first time in two years. The Atlanta Fed’s GDPNow report is still estimating growth above 4%. It is unusual for economic growth to be running this hot, with tariffs in place for nearly a year and inflation that, while sticky, has not moved measurably higher. If the government can vote on a funding bill, we should see the employment report this Friday. As has been the case with recent reports, payroll growth has been half of what has been considered “normal”. Likely due in part to lower immigration, the job market has been fairly stagnant for the past few months, with little hiring and little firing.
Interest rates have been slowly ticking higher even as the Fed has maintained a generally “easier” monetary policy. Bonds with maturities beyond 10 years have increased by nearly a quarter point, while short-term rates, those more under the Fed’s control, have dropped by a like amount. That steepening of the yield curve (the difference between short and long-term rates) has historically been an indication of stronger economic growth. Long-dated bond investors worry about a pickup in inflation and push rates higher to compensate for that risk, while short-term rates move closer to Fed policy.
The tech earnings from Meta, Microsoft, Apple, and Texas Instruments were a mixed bag. Infrastructure spending remains at the forefront of investors’ minds, but Microsoft got dinged for concerns about slowing growth in its cloud business and potentially excessive AI spending. Meta was the exact opposite, as investors cheered their high AI investments. That said, large-cap growth continues to struggle in the new year, falling each week in January. It has been a different story in other parts of the market, with value rising smartly and small stocks rising over 5% in the month. The theme that has been emerging since last Halloween is to sell the former tech winners and diversify holdings to nearly every other part of the market. The precious metals got a bit less precious, with silver falling nearly 30% and gold off 10%. While still higher for January, the decline comes after both rose dramatically in the last three months. Some point to the declining dollar, higher geopolitical fears, or general unease as reasons to buy the metals. Be that as it may, after a near parabolic move, the decline usually comes unannounced and very sharp, as Friday’s move highlighted. Cooler heads may prevail on Monday, but many others may be looking for the door.
The unemployment report will be the highlight of the week, as long as a government shutdown is either avoided or a partial shutdown. Wage growth will be a key to future consumer spending.
The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.