Stocks Disperse and Curve Steepens as Warsh Tap-Dances

The Double Line Minutes podcast episode covers market performance across multiple asset classes for the week ending July 31, 2026. In equities, the broad market gained 85 basis points, but with substantial sectoral variation: consumer discretionary led with a 6% gain following positive earnings, while utilities fell 3.5% and the technology sector declined 40 basis points, down 8% for the month. The Philadelphia Semiconductor Index experienced particular weakness, hitting a bear market (down 20%) with lows near 26% decline on July 29th. The hosts attribute some of this tech weakness to a $45 billion hedge fund unwind (Situational Awareness), which held concentrated AI positions and was forced to liquidate at discounts to Citadel Securities due to leverage constraints. The S&P 500 equal-weight index outperformed the cap-weighted index on a year-to-date basis (up 13.5% versus 10%), suggesting a broadening of market leadership. A significant momentum unwind occurred with the Morgan Stanley momentum index down nearly 19% while short momentum stocks gained 7.5%, creating a 25% performance differential.

In fixed income, the week saw a bear steepener with the 30-year Treasury selling off 11 basis points to trade at multi-decade highs of 5.27%, while shorter-duration instruments like 3-month bills pulled in 13 basis points. The U.S. Aggregate bond index declined 20 basis points with governments, mortgages, and investment-grade corporates all down roughly 20 basis points. High-yield bonds and bank loans surprisingly gained about 13 basis points each. Notably, spreads on AI infrastructure debt widened significantly, with companies like CoreWeave seeing credit stress as debt investors became more skeptical of longer-dated AI infrastructure commitments. Commodities declined 2% on the week, driven by a 3% energy decline, though energy remained up 15% for the month amid Middle East tensions including drone attacks on LNG vessels in Egypt and Iranian ships in the Caspian Sea. WTI crude traded around $85/barrel, down 5% on the week but up 23% for the month. Industrial metals gained 1% with copper up 2%, supported by AI infrastructure buildout requiring extensive copper for power infrastructure. Precious metals declined 1% with gold down 60 basis points to $4,050/oz, while Bitcoin fell 2% to $62,800.

The macroeconomic discussion centered heavily on the July FOMC meeting and Fed Chair Kevin Warsh's second press conference. The hosts characterize Warsh's communication style as 'Greenspan-esque'—talking extensively while providing limited clarity—essentially tap-dancing around substantive policy guidance. Warsh discounted core PCE as the primary inflation measure, instead reviewing multiple indicators including median PCE, which showed softer inflation. He emphasized that current inflation stems primarily from supply-side constraints rather than demand-side pressures, implying that monetary policy adjustment may not be the preferred response. The hosts interpret this dovish framing as signaling Warsh's reluctance to hike unless forced by circumstances. This market assessment drove the significant curve steepening during and after the press conference. Treasury Secretary Scott Bessent's comment that the PCE print 'makes Kevin Warsh's job easier' was noted as a telling indicator of administration preferences for a hold policy stance. Economic data during the week painted a moderating inflation picture: PCE deflator came in softer than expected at 13 basis points month-over-month (versus expectations of high teens to mid-20s), with core PCE decelerating to 3.3% year-over-year. Core services ex-housing slowed to its slowest pace since April 2024 at 12 basis points monthly. However, real income growth remains flat year-over-year despite strong consumption at 2.6% annual growth, with personal savings rates hitting their lowest level since June 2022 at 2.7%, raising questions about consumption sustainability. Q2 GDP came in at 1.5% annualized (below 2% expectations), but the composition was strong with personal consumption and investment robust; the core GDP measure of real final sales to domestic purchases showed vigorous 3.9% annualized growth. Labor market data remained subdued with initial jobless claims flat, employment cost index stable at 2.4% year-over-year (3.1% for private wages), and consumer sentiment improving marginally. Looking forward, interest rate traders are pricing in approximately a 2/3 probability of a rate hike in September and roughly one total hike through the end of 2026.