Equities — Late-Session Rout on Hawkish Fed Pivot
Wall Street reversed early gains sharply after the Fed decision, with the S&P 500 falling 1.2% to close at 7,512.15. The Nasdaq Composite dropped 1.2% to 26,376.34, while the Nasdaq 100 shed 1%. The Dow Jones Industrial Average fell 1% but had earlier in the session surpassed 52,000 for the first time, closing at a record 52,002.94 before the late selloff pulled it lower. The MSCI World Index declined 1%. Europe’s STOXX 600 had advanced earlier in the day before the US session reversed the mood.
The rotation theme that had dominated earlier sessions continued beneath the surface. Technology and Energy topped the four losing sectors among the S&P 500’s 11 sectors, while financials, industrials and real estate showed relative strength earlier in the day. Communications services led laggards, while the semiconductor index (.SOX) managed gains. SpaceX shares fell for the first time since its record IPO last Friday, snapping a three-day rally of nearly 50% — though the stock’s market capitalisation briefly surpassed Amazon and Microsoft to become the fourth-largest US listed firm near $3 trillion.
The late-session reversal was driven entirely by the hawkish dot plot. As Tom Graff at Facet put it: “Half of FOMC members penciled in at least one hike for the remainder of 2026, while only one member favored a cut. That’s a marked change from the last dot plot where the median forecast was for cuts.” Markets had entered the session expecting a hold but had not priced the magnitude of the hawkish shift. Rate markets now imply a 72% probability of a Fed hike by October.
The Warsh Era Begins — Fed Pivots Hawkish
Kevin Warsh’s debut as Federal Reserve Chairman delivered a clear hawkish message. The FOMC voted 12–0 to hold rates at 3.50–3.75%, but the updated statement removed the “easing bias” language entirely. The new statement was dramatically shorter — offering “next to no guidance beyond a factual summary of the economic situation,” as Karl Schamotta at Corpay described it. The sole forward-looking commitment: “The Committee will deliver price stability.”
The updated Summary of Economic Projections was the real catalyst. Nine of 18 officials now project at least one rate hike before year-end, eight expect rates unchanged, and just one expects a cut. The median PCE inflation forecast for 2026 was revised sharply higher to 3.6%, up from 2.7% in March, while GDP growth projections were trimmed. Warsh announced five task forces to review the Fed’s communications, balance sheet, data sources, productivity metrics and inflation measurement — signalling a sweeping institutional overhaul.
Warsh also said he is appointing a task force to examine the central bank’s $6.7 trillion balance sheet, a first step in addressing a policy issue he has long criticised. As John Velis at BNY noted: “Balance sheet policy is a key one to watch. Even though it’s somewhat arcane, it is tremendously important for financial stability, the function of the banking system and money markets, and the transmission of monetary policy.”
“The committee turned sharply hawkish, with the median participant yanking inflation projections much higher — suggesting that officials don’t expect this weekend’s US-Iran deal to result in a serious easing in price pressures — and penciling in at least one hike this year, marking a stark contrast with the cut previously expected.”
“Today’s meeting confirms that the Fed’s recent hawkish shift was not just about higher energy prices. Despite the recent pullback in oil, half of the members of the FOMC expect rate hikes as soon as this year, reflecting strong labor market and inflation data. Our base case remains that the Fed can just about avoid hikes, but the path is narrow and there will be a high premium on the incoming inflation data.”
“We completely discount the hawkish dot plot as it includes all Fed Reserve Board members including all regional Fed Presidents who are almost universally hawkish. We believe there is no chance of a rate hike given the decline in oil prices. We continue to forecast 3 rate cuts over the next 12 months as inflation declines rapidly due to plunging oil prices.”
Energy, Commodities & FX — Oil Holds, Gold Crushed by Dollar
Oil prices held relatively steady despite the broader risk-off session, with front-month Brent settling up 1.0% and WTI gaining 0.8%. Brent slipped below $80 earlier in the week on mounting expectations that the Strait of Hormuz will be fully reopened when US and Iranian representatives meet in Switzerland on Friday for a formal signing of the memorandum of understanding. President Trump said ships are “starting to go out now, and on Friday it will be completely opened.” The MoU text will be released Friday, followed by a 60-day second stage of negotiations.
Mohamed El-Erian, former CEO of PIMCO, flagged the consumer relief angle: “The 20% plunge in oil prices over the past five days will translate into real relief for US households. Expect the nationwide average price for regular gas to drop below $4 a gallon, and diesel to fall below $5 in the coming days.” The Iran deal framework includes a $300 billion private investment fund, though Trump called reports about it “fake news.” Other details remain contested, with contradictory claims about nuclear commitments.
Gold was the standout casualty of the Fed decision, falling 1.9% to $4,247.93 an ounce as the surging dollar crushed non-yielding assets. The Bloomberg Dollar Spot Index rose 0.7%, with the dollar index up 0.9% to 100.47. The euro fell 1% to $1.1490, sterling dropped 1.1% to $1.3281, and the yen slipped 0.2% to 160.75 per dollar. The 10-year Treasury yield rose 7bp to 4.495%, while the 2-year surged 17bp to 4.216%. Bitcoin fell 2.3% to $64,301.09 and Ether dropped 3.2% to $1,738.17.
Global Central Banks & Macro — A Week of Policy Decisions
The Fed was far from the only central bank in focus. The Bank of Japan hiked its key policy rate to its highest level since 1995, pressured by a weakening yen and inflation concerns. Along with the broadly anticipated hike, the BoJ outlined plans to reduce its pace of monthly bond purchases in the coming quarters. The Reserve Bank of Australia held borrowing costs unchanged but warned that “headline and underlying inflation are still too high,” flagging that rates could rise again if needed.
US economic data painted a picture of resilience. Retail sales rose 0.7% in May, breezing past analyst estimates, while pending home sales unexpectedly climbed to a six-month high. Headline inflation remains at 4.2% — its highest in three years — with core CPI advancing a more modest 0.2% in April. The unemployment rate sits at a relatively low 4.3%. As Phil Blancato at Osaic summarised: “The labor market remains strong, meaning there is no need for a cut. I’d anticipate the Fed to hold rates here for the foreseeable future.”
British inflation held firm at 2.8% in May, a 13-month low, with the Bank of England widely expected to leave rates unchanged at its decision today. India’s National Stock Exchange filed IPO papers after years of regulatory delays, marking another milestone for the world’s most active derivatives exchange.
“Our inflation projections for this year and next are far lower than the median projection, which is why we expect the next move will still be a cut. In his first meeting as chair, Kevin Warsh took an axe to the policy statement, which now offers next to no guidance beyond a factual summary of the economic situation.”
ASX Outlook & Day Ahead
Australian shares are set to open lower after the hawkish Fed pivot. ASX futures fell 61 points or 0.7% to 8,892. The stronger US dollar will weigh on the Australian dollar and commodity-linked names. Domestically, the negative gearing debate continues to dominate the political landscape, with new ATO data showing more than half of Australia’s 2.3 million investment properties are recording a cash-flow loss. Westpac CEO Anthony Miller joined banking peers in criticising the government’s proposed extension of capital gains tax changes to shares.
The ASX is set for a softer open with futures down 61 points to 8,892. The AUD faces headwinds from the surging USD. Key domestic focus remains on negative gearing policy implications and the broader fiscal debate. Offshore, a busy slate of central bank decisions and data releases dominate the calendar.
- ASX Open (10:00am AEST) — Futures indicate a 0.7% decline; watch for rotation into defensives given the hawkish Fed shift and stronger dollar.
- Bank of England Rate Decision — Expected to hold rates; UK CPI held at 2.8% in May. Any surprise tightening language could ripple through global bond markets.
- Swiss National Bank & Norges Bank Decisions — Both central banks report today, adding to the global policy picture.
- US Weekly Jobless Claims — Labour market health check after the Fed flagged strong employment as a reason to lean hawkish.
- US Philly Fed Business Index (June) — Manufacturing sentiment indicator; watch for signs of demand softening or resilience.
- US–Iran MoU Signing (Friday, Switzerland) — Formal signing expected; Strait of Hormuz full reopening timeline and nuclear commitment details remain key catalysts for oil.
Corporate Highlights
SpaceX shares fell for the first time since its record IPO, snapping a three-day rally that had reached nearly 50%. CEO Elon Musk moved quickly to deploy IPO proceeds — agreeing to buy AI coding start-up Cursor for $60 billion and earmarking $20 billion to repay a bridge loan, using up most of the $85.7 billion raised. The stock’s market cap briefly surpassed Amazon and Microsoft near $3 trillion.
CME Group announced CEO Terry Duffy will step down on 1 March after more than 25 years, transitioning to executive chairman. CFO Lynne Fitzpatrick will take over as CEO — becoming the first woman to lead the world’s largest derivatives exchange. Yum! Brands gained 2% after announcing the sale of its struggling Pizza Hut chain for $2.7 billion in separate transactions. Blue Origin is rebuilding the Florida launch site where its New Glenn rocket exploded last month, targeting a return to flight this year.
La-Z-Boy jumped after Q4 adjusted earnings per share beat analyst estimates. UniQure NV soared after announcing it will seek US approval for its Huntington’s disease gene therapy without needing a new study. In Australia, battery materials company Novonix launched a $20.7 million capital raising at a 33.3% discount, raising red flags given a 57% share price decline this year and a history of heavy capital consumption.
