Author: Zhu Xueying, Wall Street Insights

On April 21, the Iran ceasefire agreement expired. At 10 a.m. on the same day, Kevin Warsh will sit on the hearing stage of the Senate Banking Committee.

In the past two weeks, the market has been calibrating oil prices and stock markets with the progress of the Iran peace talks. WTI recently fell from a stage high of about $114 to currently about $97, while Nasdaq rose nearly two percentage points. At the same time, the significance of the Warsh hearing was compressed into a simple interest rate issue: Whether he is hawkish or not, when will he start cutting interest rates?

These are two issues of different magnitude, The market is taking the smaller one seriously.

The "last sword" left behind by Powell's era

In March 2020, it took only 11 days from the Federal Reserve's announcement to cut interest rates to zero to its actual implementation. This is followed by unlimited asset purchases. When Silicon Valley Bank collapsed in March 2023, the Fed put together the Bank Term Financing Plan (BTFP) in one weekend.

Each time, the central bank was the first to step in, faster than market expectations and on a larger scale than necessary.

This is not just a policy, it is a commitment - implicit, never written into any document: no matter what happens, the central bank is at the end.

This commitment is not free. In a quiet but persistent manner, it has driven down risk premiums across all risk assets. Growth stocks can use their forward ten-year earnings to support their valuations because someone is talking about the discount rate. The "buy down" strategy works because everyone knows who is behind that statement.

Wash resigned as a Fed governor in 2011, directly due to dissatisfaction with the continued QE. He left a sentence: "The most fundamental problem with continued quantitative easing is that it causes capital misallocation in the economy." In 2020, when the Fed once again superimposed monetary expansion on fiscal stimulus, he publicly called this "one of the worst mistakes in the Fed's history."

His logic is very clear: let the private market clear itself first, and the central bank intervenes later.

This is not "cut interest rates later", nor is it "QT more". This is putting the "last sword" back into its sheath - telling the market that it will be drawn out much slower next time.

The curve has been going this way for a long time

The spread between the 10-year and 2-year U.S. Treasury bonds is currently about +54 basis points.

The U.S. Treasury yield curve has been inverted for 27 months, the longest period in history. Ending upside down sounds like a good thing, but the problem is the way it ends.

In a normal interest rate cut cycle, the inversion is repaired by "bull steepness" - the short end drops rapidly, the long end also falls slightly, the curve naturally steepens again, and growth stocks benefit. This is standard script.

Not this time.

This time it is "bear steep" - the short end is slightly downward, but the long end is rising. The driving force is not the expectation of interest rate cuts, but the expansion of the long-term term premium: inflationary pressure, government debt supply, and the expectation that the Fed will stop buying bonds after Warsh takes over, the three lines are moving upward at the same time.

For growth stocks, bearish steepness and bullish steepness have completely opposite meanings. The bullish trend is that the discount rate has declined as a whole and valuations have been restored. The bearish trend is that long-term real interest rates are rising, and assets with high price-to-earning ratios are slowly being repriced—not a crash, but more like a gas leak.

The QT that Wash wants to do is to compress the balance sheet from 7 trillion to 4 trillion, which will accelerate this process. In the short-term, interest rates may be cut due to the economic slowdown, but in the long-term, interest rates will not follow. The current pricing framework of the market has not fully digested this matter.

Which answer is $4761 of gold waiting for?

On January 30, the White House announced the nomination of Wash. Gold plummeted in a single day, and subsequently fell by approximately 18%. The logic is linear:Hawky Fed Chairman → Stronger U.S. Dollar → Real Interest Rates Rise → Gold Opportunity Cost Rise.

After the Iran war broke out, gold rose from that low point to today's $4,761, reversing the 18% drop several times.

But there is one thing that doesn't go right today. Optimism about the Iran peace talks pushed the stock market up by 1.2%, oil prices fell by 7%, and gold only rose slightly by 0.33%. If gold was trading mainly on Iran risk premiums, it would be down today, at least not up.

$4,761 is supported by two logics.

One is the demand for inflation insurance - the energy shock pushed the March CPI to 3.3%, and the market bought gold to hedge against the erosion of purchasing power. This logic weakens as the peace talks advance, which is the direction of short-term pressure on gold.

The other one is deeper: If the next crisis comes and the Fed is no longer the first to appear, then the value of gold, as "the ultimate asset without counterparty risk", will be repriced. This has nothing to do with Iran and is directly linked to Warsh's hearing.

At the hearing, how did Wash answer "how fast will you act in a crisis?" This sentence determines which logic dominates. Confirming "the market clears first", the second logic is supported; softening the stance, the first logic will bring gold down after Iran calms down.

No one has ever encountered this kind of succession situation

On May 15, Powell’s term expired and Warsh took over. From today to that day, there is still one month.

Powell is still the chairman of the Federal Reserve, can still convene FOMC meetings, and still has the right to vote. In the meantime, Warsh is under public questioning in the Senate, and the market will begin to adjust to his signals. Two people speaking to the market at the same time may have different directions.

There is another layer of trouble. The Justice Department is investigating Powell, who has publicly said it was an effort by the White House to interfere in monetary policy. The standoff makes the transition unpredictable: Will Powell make an unusual move before leaving office, such as cutting interest rates early? This is not a baseline scenario, but it is tail risk that is not priced in the current pricing framework.

Tillis is another variable. The Republican senator from North Carolina has made it clear that he will refuse to vote for any nomination for Fed chairman unless the Justice Department drops its investigation into Powell. The Republican majority on the Senate Banking Committee only has one vote, and Tillis's vote could stall the entire confirmation process.

On April 21st, what to watch in order

The hearing begins at 10 a.m. Eastern Time. The information density in the opening statement stage is low, so you can wait.

What's really valuable is Wash's answer when asked about "the timing of crisis intervention." If he says "prudent intervention", it means that the market will be under pressure for a longer period of time at the beginning of the next crisis; if he says "data-driven intervention", it will be closer to the continuation of the Powell era, and the market will breathe a sigh of relief.

When the answer came out, 30-year Treasury bond futures were the first to move. Pricing of the term premium occurs at the long end, faster than in the stock market. Gold will follow within 20 minutes.

There are two issues worthy of special attention during the Q&A session: the timetable for balance sheet compression (there is a huge gap between "achieving 4 trillion within the term" and "achieving 4 trillion within two years"), and his stance on the Fed's independence. Whether Tillis is present to ask questions and the tone of his voice are precursors to whether the day will pass smoothly.

Watch the Nasdaq after the market opens. QQQ is sensitive to two things at the same time: the long-term discount rate (bear steep pressure on valuation) and the presence or absence of Fed Put (behavior function changes to pressure valuation). Wash's stance is clearly hawkish, and QQQ will reflect the opening pressure of the next day in advance after the market opens.

Bank stocks are in the opposite direction. Large commercial banks have benefited from the loosening of regulations and the expansion of net interest margins brought about by Xiongdeng. But this logic has already been included in the price for a considerable part - if the hearing is only "in line with expectations", there will not be a significant excess.

If Tillis says no, everything will have to be rewritten

All the above pricing logic,There is a premise: Wash will take over as scheduled on May 15.

Tillis defected and the entire framework reversed. Growth stocks have benefited in the short term, long-term debt pressure has eased, and gold's "Fed Put disappears" logic has lost its foundation.

If Warsh softens his position during the hearing - for example, making it clear that "I will act quickly in a crisis, which is not fundamentally different from Powell's approach" - the market's pricing for "changes in behavioral functions" will be partially reversed. Xiongdeng slowed down and QQQ got a breather.

One thing is more honest than the stock market: whether the 30-year Treasury term premium continues to expand in the first week after the hearing. Expansion means that the market believes what he says. Stabilizing or narrowing means that the market thinks this is a hearing performance.

The trends of 30-year Treasury bonds and QQQ after April 21 will tell you what the market believes.