Good morning. UK PM-in-waiting Andy Burnham yesterday laid out his vision for the country (pubs good, high cost of living bad, No 10 North, etc) and crucially, stuck to the existing fiscal rules. Keyword there being “existing”. As Barclays said: “There was no sense of trying to find ways to game the rules or increase borrowing, which would have worried markets.” Sterling and gilts were unruffled.

That leaves the potential for spooking the horses this week to central bankers, who have gathered in Sintra, Portugal, for the European Central Bank’s annual forum.

Today, I do some head-scratching on the Federal Reserve’s next move, and Katie ponders which bits of the markets would be vulnerable to an aggressive pivot on interest rates. Send us your thoughts: unhedged@ft.com.

<img width='1' height='1' style='display:none;border-style:none;' alt=' src='https://images.passendo.com/t/2/47857/delong@econ.berkeley.edu/5817747077646525/0/0'><img width='1' height='1' style='display:none;border-style:none;' alt=' src='https://images.passendo.com/extt/2/47857/delong@econ.berkeley.edu/5817747077646525?pid=1'><img width='1' height='1' style='display:none;border-style:none;' alt=' src='https://images.passendo.com/extt/2/47857/delong@econ.berkeley.edu/5817747077646525?pid=2'><img width='1' height='1' style='display:none;border-style:none;' alt=' src='https://images.passendo.com/extt/2/47857/delong@econ.berkeley.edu/5817747077646525?pid=3'><img width='1' height='1' style='display:none;border-style:none;' alt=' src='https://images.passendo.com/extt/2/47857/delong@econ.berkeley.edu/5817747077646525?pid=4'>

So what does the Fed do next?

New chair Kevin Warsh has, as expected, given up on forward guidance. Actually — as many are pointing out — he’s given up not just on guidance about the future but also guidance about the present and the past. Dario Perkins of TS Lombard summed it up nicely in the chart below. The emoji in the middle shows us where a legible (if imperfect) Fed dot plot used to be.

In short, Warsh’s turn towards the taciturn potentially increases uncertainty and the risk of policy surprises — a recipe for higher borrowing costs, if ever there was one.

Warsh’s press conference following his first Federal Open Market Committee meeting earlier this month offered a preview of this new regime. In the 24 hours before and after the meeting, markets significantly repriced the likely path of Fed policy over the coming year. They went from expecting one rate rise to expecting two by June next year, with the first due in the fourth quarter. This pricing mostly still holds.

But Bank of America — not to be outdone by market consensus — thinks the number of rate increases could be higher and come sooner. In an updated forecast released last week the US bank argues that the Fed could be forced to tighten three times before the end of this year, starting in September. The reason, it says, is that the labour market is showing no signs of slowing and inflation is above target and sticky. Interestingly, this case rests less on Warsh (who they suspect may want to hold) than on the hawkish tilt in the central bank’s latest Summary of Economic Projections.

While hardly anyone is expecting a rate increase at next month’s FOMC meeting, the release of the June non-farm payrolls on Thursday (yes, Thursday is a weird day to do it, but Friday is a holiday in the US) will tell us a lot about the Fed’s likely course of action in the second half of this year. It is notable that Warsh barely mentioned the full employment side of the Fed’s mandate during the presser, which could be taken as a sign that he considers it met or less important now than price stability. Last week, the headline personal consumption expenditures data for May came in slightly above expectations at 4.1 per cent (year on year). Of course, one way to get the rate down is to shift the goalposts. Warsh has expressed a preference for the trimmed mean PCE, which the Dallas Fed calculates at 2.4 per cent. Price stability achieved? Perhaps one of his task forces can tell us the answer.

As if to underline the point about less communication sparking more confusion, investment house Amundi put out its own forecasts on Monday. It has concluded that the number of Fed rate rises this calendar year will be . . . zero. It expects the central bank to resume rate cuts next year.

Warsh has said a lot about speaking less. So far the proof of the new regime is June’s FOMC statement (cut to under half the typical length) and his refusal to plot a dot. The minutes — the wordiest thing the Fed produces — are due on July 8. Warsh is also on a “policy panel” alongside his counterparts from the UK, Eurozone and Canada in Sintra on Wednesday.

(MacFadden)

One corner of financial markets that could really feel the pain from a sizeable rise in rates, on the scale that BofA sketches out, is US small caps. They’ve had a great run — the Russell 2000 index is up by 21 per cent so far this year, streets ahead of the 7 per cent gains in the S&P 500.

This makes sense — 2026 has been all about the broadening trade as the Mag-7 become the Lag-7 (a term I am shamelessly nicking from Callum Thomas on Bluesky.)

HSBC’s multi-asset team notes that the outperformance of smaller stocks is down to a mix of higher earnings and higher multiples. It certainly looks like there’s a hint of animal spirits at play. 

But higher US rates are exactly what this trade does not need. From HSBC, with our highlights for extra: 

(Martin)

<img width='1' height='1' style='display:none;border-style:none;' alt=' src='https://images.passendo.com/t/2/40827/delong@econ.berkeley.edu/8175842081734281/0/0'><img width='1' height='1' style='display:none;border-style:none;' alt=' src='https://images.passendo.com/extt/2/40827/delong@econ.berkeley.edu/8175842081734281?pid=1'><img width='1' height='1' style='display:none;border-style:none;' alt=' src='https://images.passendo.com/extt/2/40827/delong@econ.berkeley.edu/8175842081734281?pid=2'><img width='1' height='1' style='display:none;border-style:none;' alt=' src='https://images.passendo.com/extt/2/40827/delong@econ.berkeley.edu/8175842081734281?pid=3'><img width='1' height='1' style='display:none;border-style:none;' alt=' src='https://images.passendo.com/extt/2/40827/delong@econ.berkeley.edu/8175842081734281?pid=4'>

“One of the biggest corporate lay-off programmes in history”.