Warsh Settles In as Yields Hit Historic High

Every morning before the opening bell, the Schwab Market Update sets the stage for the day ahead, covering key market movers, economic developments, and emerging themes. Each edition includes "Three things to watch" and every Thursday features a weekly section, "Crypto currents." This recap revisits select items for those who may have missed them, helping traders head into the weekend better informed.

Kevin Warsh takes over the Fed at an auspicious time with futures trading building in much higher chances of a rate hike at some point this year. The chance rose as high as 60.9% this week, from less than 1% a month ago, according to the CME FedWatch Tool. The first meeting with Warsh will be in mid-June, and no rate move is expected. No rate cuts are seen over the next year, per the futures market. That's opposite of the last Fed projections, which forecast one cut this year. The projections will be updated next month and become more crucial the longer the war, high oil, and lofty yields remain factors. "We think they'll be on hold for several meetings," said Collin Martin, head of fixed income research and strategy at the Schwab Center for Financial Research, or SCFR. A shift toward rate hikes would be more likely if core inflation, which excludes food and energy prices, continues to increase meaningfully, Martin added. Another factor that could lead to rate hikes is if the labor market starts to improve.

Taylor Swift was 17 and television series Mad Men debuted in July 2007, the last time the U.S. 30-year bond yield reached levels posted Tuesday near 5.19%. "Higher yields reflect not just higher oil prices and a longer expected timeframe for the Iran conflict, but also hotter inflation data, global yields moving higher, and the new incoming Fed chair," said Nathan Peterson, director of derivatives research and strategy at SCFR. "Bond vigilantes" might be the culprit for this selloff in Treasuries, which move opposite of yields. Treasuries can weaken when holders fear unrestrained inflation. This can sometimes bring hawkish Fed policy to soothe the bond market. Higher yields also might reflect less interest in U.S. assets among international investors now finding improved yields in their own markets. Foreign residents decreased their holdings of U.S. Treasury bills by $16.8 billion in March, the U.S. Treasury Department said earlier this week. Recent Treasury auctions saw tepid demand, and the Treasury auctioned off $16 billion in 20-year bonds on Wednesday.

Bitcoin investors are learning an old lesson: It takes time to recover psychologically from the pain of a bear market. The cryptocurrency's roughly 30% rally from its February low had fueled hope of a new bull market among some investors. But a convergence of technical obstacles around $82,000 has served as strong resistance. The most obvious was the 200-day moving average. Bitcoin approached it several times in recent weeks, failing to poke its head above it even for a minute. The 200-day also sits in a natural profit-taking zone around $82,000. That's roughly the average cost basis for investors in bitcoin exchange-traded products (ETP), while $78,000 is the average cost basis for more-active investors in the secondary market. And after a months-long bear market, many investors are naturally selling at those "break-even" levels, said Jim Ferraioli, director of crypto research and strategy at SCFR. Any move beyond this month's short-term high around $82,759 will need to overcome that urge to get out and leave the painful bear market in the past. For now, the recent gains are just a bear market rally.

After taking it on the chin earlier this year, software shares have climbed 20% from their April lows, led by ServiceNow (NOW), which got a buy rating from Bank of America earlier this week. Though the sector remains burdened by ideas AI could pose competition, ServiceNow and others have long offered AI products of their own and say AI could be a boost for the industry. Last week, ServiceNow announced a partnership with a Dublin software firm to use autonomous AI agents to process business data. Adobe (ADBE), meanwhile, earlier this year released CX Enterprise, which tied together its three core content supply chain products, Barron's reported. This got a positive response from Nvidia (NVDA) founder and CEO Jensen Huang at Adobe's product event in late April, endorsing the AI use case for Adobe's products. The rub? Nvidia and Adobe have a strategic partnership, so Huang wasn't necessarily a neutral observer. Software earnings pick up next week as Salesforce (CRM) and Snowflake (SNOW) open their books Wednesday followed by Autodesk (ADSK) on Thursday. "Software versus semis is finally seeing some mean reversion," Peterson said earlier this week when software shares gained on chips.

Gasoline now costs more than $4.50 a gallon across the U.S., the highest heading into Memorial Day weekend since 2022. The weekend is significant because it historically represents the start of U.S. "driving season" extending to Labor Day in early September. Travel is typically busy on Memorial Day weekend, but recent inflation data pointed to much higher airfares, meaning investors might want to look at travel data when they return from the holiday next Tuesday. Any lag in air travel—there's no sign of one yet—might suggest consumers pulling back in the face of rising prices. Last year, Memorial Day air travel peaked on the Friday before the holiday at 3.01 million, followed by 2.86 million on the holiday itself, according to the Transportation Security Administration's (TSA) checkpoint travel site, which is updated daily. Beyond travel, for the most part higher oil prices haven't yet worked their way into consumer prices, meaning there could be more pain to come.