WEEK ENDING 7/17/2026
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- US-Iran conflict resumes
- Good CPI number
- Good PPI Number
- Warsh testifies before Congress
- Two Fed officials speak
- President speaks to the American people
A CITY DIFFERENT TAKE
The U.S.-Iran conflict continues to be hot. West Texas Intermediate (WTI) crude oil futures reached $82.49 per barrel on July 17. Last month’s cessation of military strikes helped oil prices and probably June CPI and PPI numbers. The price of WTI on June 26 was $69.23 per barrel, down from $89.17 a barrel on June 1.
The CPI report was released last week. Year-over-year core CPI was 2.6%, below the estimate of 2.8% and 0.3% below May’s 2.9%. That was followed by the PPI release which showed producer prices at the core level rising 4.7% from a revised May figure of 6.0% (May’s figure was revised down from 6.5%).
New Fed Chair Kevin Warsh testified before Congress last week. His emphasis seems to be fighting inflation. But what inflation measure will he be fighting? We will have to wait for one of the five Fed task forces to report back. The Wall Street Journal (WSJ) reported:
“Chairman Kevin Warsh pledged to lawmakers on Tuesday that the Federal Reserve will bring inflation down, saying members of its rate-setting committee ‘have no tolerance for persistently elevated inflation’.” Tough Talk
Chair Warsh was not the only Fed Board member to speak last week. Chris Waller dropped a couple of nuggets:
“‘There is still a credible case for inflation to begin to fall back to our 2% goal with policy at its current setting. But I am concerned about the equally plausible case that data in the coming weeks will show that inflation will remain at its elevated level or even trend higher, requiring tighter monetary policy in the near term,’ Waller said.” No ambiguity there
He went on to identify what he felt were the root causes of our current inflation:
“The policymaker emphasized a deliberate approach as policymakers evaluate the root causes of inflation, which he listed as tariffs implemented in 2025, the rising energy prices associated with fighting in the Middle East — and ‘spillovers from demand’ from artificial intelligence.” Tariffs are inflationary, really!!!
If that wasn’t enough Fed speak, Michelle Bowman ventured into the fray.
“Federal Reserve Governor Michelle Bowman on Friday cautioned against raising interest rates to address the current spike in prices.” Another voice and opinion
Dallas Fed President Lorie Logan was a bit firmer in her opinion:
“(Logan), a voting FOMC member, was perhaps the lone policymaker who still came out strongly in support of a rate hike, saying Thursday she believes that ‘modestly’ higher interest rates are needed. Without policy intervention, inflation appears to be heading toward the mid-2% range — not all the way back to 2%, she said.”
Barron’s summarized last week’s communications from Fed officials as follows:
“The Federal Reserve is far from declaring ‘mission accomplished’ in the fight to lower inflation, but for most of the central bank’s policymakers, cooler price-growth readings this past week have reduced the pressure to raise interest rates.
“The straw count, as of now, among voting members of the FOMC who have weighed in this past week suggests that they will hold rates steady at the July 28-29 policy meeting.” Different Opinions at the Fed
The next Fed meeting should be interesting — a real “family fight.”
The president addressed the American people Thursday night. The WSJ quick summary was:
“President Trump delivered a prime-time address alleging the U.S. election system was compromised, without providing evidence of voter fraud or altered election outcomes.” More Spaghetti thrown against the wall
CHANGES IN RATES
TreasuryMarket
Treasury yields were lower for the week — a surprisingly muted move given the inflation releases (CPI & PPI). The 2/10 spread is at 37 basis points. The renewed military operations between the U.S. and Iran put pressure on rates.
MunicipalMarket
This week the municipal market underperformed the Treasury market, losing some of its richness. AAA general obligation municipal bonds were higher in yield across the maturity spectrum. The 2/10 slope is at 66 basis points, flat by historical standards.
Selected Municipal AAA General Obligation Bond / Selected Treasury Bonds Yield Ratio
The municipal bond market cheapened relative to its Treasury equivalents, giving up around 2.0% on the week.
Investment Grade Corporates
Investment grade corporate yield completely diverged from the Treasury market rally. Credit market saw rates go up. The 2/10 spread is stable at 86 basis points.
THIS WEEK IN WASHINGTON
Kevin Warsh was not the only person testifying before Congress this week. U.S. Attorney General nominee Todd Blanche faced the Senate Judiciary Committee for his confirmation hearing.
“Two Republicans on the Senate Judiciary Committee on Thursday said they remained undecided about voting to confirm Todd Blanche for U.S. attorney general, endangering President Donald Trump’s nominee to be the nation’s top law enforcement official.
“The resistance to Blanche, who is Trump’s former criminal defense lawyer, is the latest example of Republicans who are leaving office erecting a roadblock to Trump’s agenda while raising concerns about some of the president’s actions. Tillis is not seeking reelection this year.” Am/Was… Who Knows?
Jay Clayton, the administration’s nominee for director of national intelligence, also had a confirmation hearing last week.
“Clayton, a top federal prosecutor and former chairman of the Securities and Exchange Commission, spent much of the hearing presenting himself as a stabilizing figure focused on management rather than politics. But his refusal to plainly state that Biden won the 2020 election underscored the limits of how far even more conventional nominees are prepared to separate themselves from Trump.” Dems one trick pony
WHAT, ME WORRY ABOUT INFLATION?
The graph above contrasts a 5-year Breakeven Inflation Rate (this is the market-implied inflation rate) tracked weekly with the core PCE inflation rate. The 5-year Breakeven Inflation Rate finished the week of July 17 at 2.27%. The 10-year Breakeven Inflation Rate finished the period at 2.24%. Both these numbers are marginally higher week over week.
MUNICIPAL CREDIT
The 10-year quality credit, which is the difference between BBB revenue bonds and AAA general obligation bonds, was at 0.90% versus a long-term average of 1.67%.
TAXABLE CREDIT
Investment-grade spreads for the past week were at 91 basis points. The long-term average for investment grade is 1.55%. High-yield credit spreads are 2.60% versus a long-term average of 4.51%
WHERE ARE FIXED-INCOME INVESTORS PUTTING THEIR CASH?
Money Market Flows (millions of dollars)
Money market fund flows were negative across the board.
Mutual Fund Flows (millions of dollars)
Mutual fund cash flows were generally positive for the week.
ETF Fund Flows (millions of dollars)
Net ETF flows were mixed week over week.
SUPPLY OF NEW ISSUE BONDS
This week’s calendar is $11+ billion. This year’s supply calendar has been robust and running 120% of the 5-year average.
CONCLUSION
The conflict with Iran remains hot. Kevin Warsh seems fixated on inflation as the major risk facing the fixed-income markets. But what inflation measure will be the Fed’s focus? There are varied opinions as to what the Fed’s next move should be. The municipal market looks to be cheapening.
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