New Fed Chairs are often tested early in their terms. For instance, two years after Bernanke took over the Fed, the Financial Crisis kicked into full gear. Janet Yellen was tasked with addressing stock market weakness as the Fed was navigating an exit from QE. Powell’s early test was a rate-hiking cycle that spooked markets in 2018, followed by the Pandemic two years later. Kevin Warsh, who took the Fed Chair just weeks ago, may have received his first test with last Friday’s employment data.Warsh inherits a Fed that has kept rates at restrictive levels as inflation has remained stubbornly high, even before the additional boost from the Iranian conflict. Furthermore, consumer confidence is near pandemic lows, and bond yields are pushing higher. On top of that, as we share in “The Week Ahead” section below, May’s nonfarm payrolls came in at 172,000, almost double expectations. Yields jumped immediately, and stocks sold off.The market reactions were a function of rising odds of a rate hike. Any thoughts that Fed Chair Warsh has about being dovish, whether in tone or action, will not sit well with bond investors, who are witnessing high inflation and a resurgence in the labor market. Simply, the Fed Chair has no credible path to cutting rates in the near term. Warsh’s first meeting will likely be a “hawkish hold.”The question for investors is not whether Warsh holds rates steady on June 17. He most likely will. The question is whether he can soothe bond market concerns, and whether investors believe him. As shown below, Fed Funds futures are now pricing in a 50% chance that the Fed hikes rates by October.The Week Ahead & JobsThe BLS jobs report showed continued strength in the labor market for the third month in a row despite higher oil prices. As we share below, payrolls increased by 172k jobs. Moreover, March jobs were revised up by 29,000, from +185,000 to +214,000, and April was revised up by 64,000, from +115,000 to +179,000. With these revisions, employment in March and April combined is 93,000 higher than previously reported.This week, the market will get a fresh inflation update via CPI and PPI. Headline and core CPI are expected to come in at 0.4% and 0.3%, respectively. Core PPI, which rose much more than expected last month, is expected to slow to 0.3%, compared to last month’s 1.0%.The inflation data is tricky to forecast due to the volatility in energy prices and the many ways they impact the prices for other goods and services. We suspect the markets will take both inflation figures with a grain of salt, believing that the impact of Iranian inflation is temporary.Also on the docket are the US Treasury’s 10-year and 30-year bond auctions. We will look to see how demand stacks up now that yields are higher. While not well followed, the 7-year auction a week ago was met with extremely strong foreign demand.Tweet of the DayOriginal Post