Real Rate Relief

Don't forget about bank regulatory policy, Chairman Warsh is doing just fine, the productivity cyclical versus secular debate and some asset allocation changes

In this week’s note:

· Tempest in a Teapot: The reaction to Chairman Warsh’s press conference and Secretary Bessent’s defense of ending forward guidance looks overdone to us; market pricing showed little evidence of a credibility event. The more underappreciated development in the coming months is the regulatory relief agenda; particularly capital and liquidity requirement changes that could free bank balance sheets and help privatize the Fed’s balance sheet. There are not going to be any rate hikes, but rate cuts most likely will be pushed into ’27 unless labor market weakness accelerates due the time it will take to complete the work of the task forces and bank regulatory relief.

· Labor Market Disinflation: The July employment report reinforced our view that the labor market is no longer an inflation risk and is increasingly a disinflationary impulse. Payrolls, the household survey, participation, and wage growth all point to weak supply and demand balance, while low churn suggests wage deceleration has further to run. The Fed’s singular focus on inflation is likely to shift as the risks to the full employment mandate become harder to ignore.

· Earnings Boom: Second quarter earnings were exceptionally strong, though 40% growth is not sustainable, and a slower rate of change is likely to compress the market multiple. The leadership remains concentrated, but financials and industrials look increasingly attractive given positive revisions, margin expansion, regulatory relief, and manufacturing renaissance themes. We still do not see a compelling case for consumer sectors, where margins are weak and valuations remain above market.

· Productivity Cyclical or Secular: Productivity is improving, but the key question is whether this is merely cyclical or the beginning of a secular capital spending and technology adoption boom. Macro and corporate data suggest technology, financials, and industrials are leading the gains, while labor share weakness keeps us cautious about calling it a durable boom. For now, stronger productivity is good for shareholders, but if labor does not participate in the gains, it becomes a political risk.

· Market Wrap: Next week’s CPI, PPI, retail sales, Treasury refunding, and budget data should help clarify whether the disinflationary impulse is gaining momentum. We expect tariff rebates, China excess capacity, wage disinflation, shelter convergence, and market-implied breakevens to keep pressure on inflation expectations. In portfolios, we are adding to financials and the long end of Treasuries, funded by reduced cash and lower short-end Treasury exposure, while remaining secular bond bears but near-term bond bulls.

Note: We use Copilot to help us with the summary, but the 3000+ words and 17 charts and tables that follow the paywall is all us, authored the old-fashioned way.