The Fed Never Promised a Rate Hike | But Markets Panicked Anyway | Kenny Polcari

Well, good morning. Yes, it's me, Kenny Polcari, your host of the party. Today is Monday, August 31st, 2026, the final trading day of August, and we are now into Labor Day week. It's going to be a holiday-shortened week next week, but here are the things that you need to know to get your day started. Look, on a personal note, my daughter's getting married this weekend, Labor Day, Saturday, September 5th. So I am going to be taking the rest of the week off as we prepare for this event. I will be back next week, and I just want to say thank you to everybody for all your support and your kind commentary over the years. I appreciate it more than you can imagine. In any event, try the fettuccine and salmone because that's what we're going to have for dinner tonight. It's a perfect end to the summer. Okay. Well, good morning and welcome to the final week, right, of, uh, of summer 2026. So let's take a look at what happened on Friday. Jackson Hole. Yes, Kevvy Warsh came out and he acknowledged concerns put forth by Beth and Jeff, something we suggested he might do. Remember, both of these Fed chairs had started screaming that rates have to go up because inflation is not cooperating, and Kevvy said, I hear you. But contrary to what some people may say, he did not promise a September rate hike. Let's be clear about that. He may have opened the door, but he did not commit to a rate hike. And yet traders and algos wasted no time running right through that door, betting that he's planning on raising rates. Now, speaking at the Fed's annual Jackson Hole Symposium, Walsh actually said, and I quote, we must be confident that underlying inflation is moving to our objective clearly and at sufficient speed. Otherwise, We have work to do. And there it is. Otherwise, we have work to do. And what did the trader types and the algos do in the bond market here? Well, they heard higher rates on the back of that, on the back of that sentence. I didn't. I don't know about you. I didn't hear higher rates. Either way, the 2-year Treasury surged by 11 basis points, so 4.34%, the biggest one-day move since March. As traders immediately repriced the odds of a September hike, now putting the chances of that hike at 61%. That's a 25% increase over the odds just moments prior to his speech. But here's where it gets interesting, because remember, the Fed has much more direct influence over the short end than they do the long end. And while the 2-year shot higher, the 30-year barely moved. It was up 1 basis point, and that is important. Because Friday wasn't another bond market tantrum over debt and deficits and Treasury supply and Scotty Bessinger fiscal credibility. It was a monetary policy repricing, not a fiscal credibility event. He told us that he understands that inflation is a problem. He's prepared to deal with it. He also said that the financial conditions are not currently restrictive. And yes, the 10-year is kissing 4.7%. The 30-year is kissing 5.2%. And yes, mortgage rates are a bit elevated at 6.7%. But in his mind, they are not restrictive, which means that they may not be high enough to finish the job. And that's what got everybody's attention. Now, not mine. I'm not hearing the same thing, but we could talk about it. So stocks lost a tiny bit of ground. The Dow down 9 points, S&P down 20, the NASDAQ lost 140. The Russell, though, gave back 42 points or 1.4%, and that's significant. The Transports lost 61 points. The Equal Weight S&P gave up 33 points while the Mag 7 actually gained 210 points. Now the move in the Russell makes perfect sense. Small and mid-cap companies are sensitive to financing costs. So when the 2-year suddenly surges by 11 basis points and the market starts pricing in another rate hike, guess who's gonna feel it first? Small and mid-cap. The smids. And so therefore they get hit. But let's keep this in perspective. The S&P only lost 19 points. That's it. Kevin Walsh stood up, he reminded everyone that inflation remains above target. He told us that financial conditions aren't restrictive. He opened the door to another rate hike. He sent the 2-year screaming higher, and the S&P lost a quarter of 1%. Hardly panic. In fact, I'd argue that may be the more important message from Friday. So let's talk about gold, because gold, it got punched in the face coming into Friday, right? Gold was trading at $4,630, was up sharply from the early August lows as gold bugs had piled into the trade over concerns about inflation and fiscal discipline and geopolitical risk and instability in the bond market. And then Kevvy spoke. Yields surged. The dollar rallied and suddenly the move higher in gold had the rug pulled out from under it. By the end of the day, gold had lost more than 3%, nearly $150, to close at $4,455. So why the vicious reaction? Because gold got hit with a left and then a right punch, right? Higher Treasury yields, which represent the left punch, increase the opportunity cost of owning an asset that pays you absolutely nothing. No dividends, no interest. While the stronger dollar, which was the right punch, creates another headwind for gold. And then if you add in the sudden repricing of Fed policy, uh, uh, that makes a difference. Because on Thursday, traders were assigning a 31% chance of a September rate hike. After Kevvy spoke, those odds jumped to 61%. So suddenly the gold trade had to deal with the stronger dollar, higher yields, and the possibility that the Fed isn't finished raising rates just yet. And so it was a sell first, ask questions later type of reaction. Friday's move took gold down and through $4,530, the $4,530 trend line. And the overnight, we saw continued selling, right, taking us down to $4,396 before the buyers showed up, which leaves gold sitting right on top of the next trend line. Now the question becomes, was Friday simply a Kevvy Warsh-induced flush? Or does gold need a bigger reset? Well, we're about to find out because Kevvy may have changed the interest rate conversation, but he didn't suddenly make all the other reasons that investors own gold disappear. So for instance, the fiscal concerns, they haven't disappeared. The debt and deficit hasn't disappeared. Geopolitical risk certainly hasn't disappeared. In fact, you could argue that it got— it was heated up again over the weekend. and inflation hasn't disappeared. In fact, that's the whole reason Kevvy is talking about potentially raising rates in the first place. So don't necessarily interpret Friday's move as the end of the gold story. I think it's about a test. If gold can hold $4,370, which is trendline support, and then reclaim $4,530, then Friday may have turned out to be nothing more than just a shaking of the branches after a very strong August run. But if $4,370 doesn't hold, then the reset may have further to go, and that reset could get us right back to $4,200 on the charts. Either way, a 14% move in gold off the August lows meant that gold was due for a bit of profit taking. And so that's what we saw. Next up is oil. It continued to hover in the $83 zone, which was about a 4% loss for the week. That move was about the continued chatter of a new diplomatic agreement with Iran that could normalize the shipping through the strait. Blah, blah, blah. And that actually creates another interesting dynamic for Kevvy and the Fed. If oil prices fall, then inflation eases, and that blows the whole inflation argument out of the water. So we need to stay tuned on that. But not so fast, because this morning oil's up 3.4% at $86.30 after the US struck 2 Iranian rocket launches on Larak Island, which is right at the strait, over the weekend. The Iranians returned the fire, launching missiles and drone strikes on 2 US air bases in Jordan. And all that does is raise the temperature in the room again. And just like that, they put the risk premium right back into the price of oil. So it's one step forward and it's 2 steps back. And by now you also heard of the massive oil deal that Trump just struck with Venezuela. The administration calling it the biggest oil deal in US history. And 65 billion barrels certainly gets everybody's attention. The US gets majority control over the development of 17 Venezuelan oil fields with an additional production target of 1.5 million barrels a day. Strategically, it's a big deal because it gives the US another potentially enormous source of crude outside of the Middle East. But let's be clear, those 65 billion barrels of oil aren't sitting on a dock waiting for a tanker. No, no, no. Venezuela's infrastructure is a mess, and it's going to take billions of dollars and years of, of investment and reconstruction to meaningfully increase production. So this could be very important long term for US energy security, but it isn't going to suddenly knock $20 off the price of a barrel of oil tomorrow morning. Now, there's no economic data today, but there are some important data points later in the week. We're going to get S&P Global Manufacturing and Services PMIs, both expected to remain in bullish territory. ISM prices paid, ISM new orders, the JOLTS report, ADP employment, and Friday's nonfarm payroll report. Earnings, we're going to get Palo Alto and Dell on Tuesday. We're going to get Broadcom reports on Wednesday along with Snowflake and, uh, and HPE. Those are all after the bell. Now, after Nvidia blew the doors off the bus last week, uh, Broadcom becomes the next test of the AI infrastructure story. Then on Thursday, we're gonna hear from Zscaler and Sienna. So while earnings season is essentially over, AI, cybersecurity, enterprise tech are not done talking yet, right? So pay attention. European markets are mixed. The UK is closed today for a holiday, so nothing going on there. US futures are all lower. Dow futures down 135, the S&P is down 25, the NASDAQ is down 33, and the Russell is lower by 8 points. Again, nothing really dramatic, nothing to get, you know, write home about. As noted, it is the last day of August and it is the start of a holiday week. The 2-year Treasury yield, which exploded 11 basis points on Friday, is down 3 basis points this morning as investors reconsider whether Friday's reaction may have just gotten a little bit, just a little bit ahead of itself. Because here's the thing. Yes, Kevvy sounded a bit hawkish, but he did not say we're raising rates in September. The market said that, and that Makes a difference. I am still in the camp that the Fed does absolutely nothing in September, or actually for the rest of the year. I think we're on hold through the end of the year. The bond market is already doing some of the heavy lifting, and I think Kenny is perfectly fine letting it do just that. Remember, Warsh doesn't want to spoon-feed anybody. He doesn't want to spoon-feed you or the markets with any forward guidance. He wants the data to do the talking. Now remember, traders took, we have work to do, and immediately translated into September rate hike. Maybe, but Kevvy didn't say that. And this week, there's plenty of data to do all the talking. So let's see what it says before we start with the histrionics. Now, the S&P closed Friday at 7,711, down just 19 points. Stocks are not panicking. The bond market is not panicking, and with summer coming to an end and volume still light, I would not read too much into every tick. I see 7,650-ish as near-term support, while the more important trend line sits closer to 7,550. And now September, historically the most difficult month of the year for stocks, is about to begin. The Fed is in play, Iran is in play, The midterms are in play and everyone is about to come back from the beach. So strap in. Now, if you'd like to discuss your goals or evaluate the risk in your portfolio, simply just get a second opinion. You can give me a call at 561-931-0190, or better yet, you can go to the webpage at slatestone.com and click on the Contact Us link at the top of the page. It'll come right to me. As you know, I'm always happy to provide a complimentary portfolio review and a risk assessment. Okay, so now it's dinner time, and what do we have for dinner? Well, it's the end of summer. This is kind of a great dish. It works, it works all summer. And so before you kiss it goodbye and, uh, with Labor Day weekend, try the fettuccine e salmone, right? It's fettuccine with Nova salmon, baby arugula, and a brandy cream sauce. It's one of these dishes that sounds really fancy, but it is ridiculously easy to make. Right? It's the creamy, smoky, a little peppery from the arugula, and it's finished with just enough brandy to give the sauce a little bit of attitude. So for this, here's what you need. You need fettuccine. You can get fresh-made or you can get boxed fettuccine. Nova smoked salmon, baby arugula, shallots, heavy cream, brandy, butter, extra virgin olive oil, and fresh grated Parmigiano cheese, along with salt and pepper. Bring a large pot of salted water to a rolling boil and then cook the fettuccine till it's al dente. About 8 minutes or so, right? While that's happening, get a large sauté pan over medium heat. Add some butter and a splash of olive oil. Now toss in the shallots that you've diced and sauté those until they're soft and translucent. You don't want to burn them. Make sure you don't burn them. Now take the pan off the heat just for a moment. Here's where you're going to add the brandy. Once you add the brandy, then return it to the heat. Let it come to a bubble and reduce by— it'll reduce by half. Now lower the heat down to medium-low and add in the heavy cream. Let it simmer gently for a couple of minutes and it's gonna thicken up. It's gonna get really nice and delicious. Now when the fettuccine's done, you're gonna take it out of that pan with some tongs. Take it right out, put it right in the sauté pan with the sauce. You're gonna take a little bit of the pasta water to loosen it up a little bit and let the sauce become like silky and it coats the pasta. Now add the Nova salmon that you've sliced into strips. Just add that and toss it gently in the hot pasta. You don't want to cook the salmon to death. It's already cured and smoked. You just want to heat it through the pasta and the sauce just to warm it up. Now turn the heat off, take it off, take the pan off the heat and add a couple of handfuls of baby arugula and toss it again. The residual heat from the pasta is going to be just enough to wilt the arugula, but keep the peppery bite. Now you're going to add 2 handfuls of fresh grated Parmigiano cheese. Toss it, taste it, adjust if necessary. You want to serve this immediately in warm bowls and finish with a little bit of parmigiano on top with some fresh arugula just sitting on top. It is simple, it is elegant, and it is delicious. And until next week, take good care.