Mum’s The Word: Kathryn Rooney Vera on Fed’s Second Meeting under Kevin Warsh, Plus Earnings Breakdown (Live Replay)

The Federal Reserve held rates at its second meeting under Kevin Warsh, a call Kathryn Rooney Vera made correctly against market pricing that assigned roughly 30 percent odds of a hike, with some participants placing those odds at 50 percent. Vera found Warsh's press conference unrevealing and internally contradictory, noting that Warsh has publicly committed to transitioning the Fed toward a laissez-faire posture yet spoke at odds with that position during the conference. She expects status quo policy through year end, with communication pullback beginning next year.

Vera's base case is one rate hike this year, most likely in December, with one to two additional hikes the following year. She has abandoned her earlier call for rate cuts by year end. If monthly inflation averages 0.2 percent through year end she sees a good chance of no hike at all, but if it averages 0.3 percent at least one hike is likely. She predicts inflation will miss the 2 percent target for the next two years and that the Fed has demonstrated comfort with inflation remaining above 3 percent. The yield curve steepened after the meeting, with the 30-year selling off and the 2-year dropping, which Vera interpreted as markets pricing in persistent above-target inflation and migrating risk premium out of press conferences and into the curve itself.

June CPI came in flat, weakened by an oil price retracement, with shelter rising only modestly. Vera flagged food costs as a pipeline risk, citing the closure of the Strait of Hormuz and its effect on fertilizer supply, with sulfur prices extremely elevated as a leading indicator of fertilizer and then food price increases. She argued high rates are a less efficient inflation-fighting tool than in the past because net zero immigration has reduced labor force participation such that the unemployment rate stays sustainably low with fewer than 10,000 new non-farm payroll jobs per month, against the 150,000 to 200,000 previously needed. Average non-farm payrolls over the past 12 months have been approximately 36,000. Nominal GDP is growing at 6 percent year over year while real GDP was approximately 2.2 percent in Q1 and is expected to come in just over 1 percent in Q2.

Vera does not view the AI and semiconductor CapEx cycle as a bubble because the enterprises involved are profitable, unlike the unprofitable companies of the early 2000s tech boom, and global CapEx investment anticipated at over 700 billion dollars for the year is positive for productivity. However, she cautioned that widespread AI-driven productivity gains have not yet materialized and warned that the economy is vulnerable to concentration in AI CapEx, with investment needing to broaden to sustain growth. On positioning, she would not extend far out the yield curve and tactically favors flattener trades. She recommends buying put spreads on AI and tech portfolios when the VIX breaks below 15 into the 12 to 13 range. She views gold as a hedge against loss of Fed policy credibility and recommends accumulation on retracements, though a genuinely disciplined Fed and sustained rise in real yields could weaken that case. She entered the year with energy stocks as a top pick and they have been the top performing sector year to date, but she is now more cautious and recommending clients realize some profits.

Microsoft reported Q1 revenue of 90 billion dollars against expectations of 87 billion dollars, with non-GAAP EPS of 4.74 dollars versus an analyst mean of approximately 4.20 dollars. Azure cloud revenue grew 43 percent. Total CapEx including finance leases was approximately 41 billion dollars, a slight miss versus the high analyst estimate of 45 billion dollars, and annual property and equipment additions nearly doubled from 64 billion to 115 billion dollars over the past twelve months. Cloud gross margin percentage was declining, likely reflecting depreciation from heavy CapEx. Microsoft stock rose approximately one to three percent after hours.

Meta reported EPS of 6.18 dollars against an expectation of 7.22 dollars, a miss below the street range of 6.29 to 7.34 dollars, and the stock fell approximately five to seven percent after hours. Revenue rose 28 percent year over year but costs and expenses rose 55 percent, causing operating income to fall 8 percent to 18.7 billion dollars from 20.4 billion dollars. Next quarter revenue guidance of 61 to 64 billion dollars implies only roughly 1 to 5 percent quarter over quarter growth. Meta's 2026 CapEx guidance was narrowed to 130 to 145 billion dollars from 125 to 145 billion dollars, which one analyst characterized as an anemic raise relative to other hyperscalers. Reality Labs generated 431 million dollars in revenue against an operating loss of 4.6 billion dollars. Google beat on both earnings and CapEx but the stock did not rally, which was flagged as a negative signal. The semiconductor complex sold off approximately four to four and a half percent on the day despite large hyperscaler CapEx numbers, indicating those figures were not satisfying semiconductor investors.