Hello there,
Financial markets briefly turned upside down this week over the fate of Fed Chair Jerome Powell. U.S. President Donald Trump quelled the volatility by saying he was not planning to fire Powell, but also said he was keeping his options open.
That kind of messaging keeps uncertainty bubbling under the surface. Trump's attacks on Powell have now shifted away from talk of hiring a successor early, creating a "shadow" Fed boss, to criticism over spending overruns in a renovation of Fed headquarters. That has intensified concerns among market participants that the Trump administration might try to fire Powell for cause, perhaps the only legal path for it to do so. Betting markets have certainly spied the renewed risk. The Polymarket site shows punters assigning a one-in-five chance of Trump removing Powell this year compared to just a 10% probability this time last month.
Trump's repeated attacks on Powell have prompted investors to protect portfolios against the risk of higher inflation, as a central bank more willing to lower interest rates could fuel price rises and make lenders demand higher compensation to hold bonds.
If market participants perceive that Fed independence is eroding, moves in financial assets could be wild. One of the top risks is that investors will sell Treasury bonds, lifting interest rates on longer-term maturities in the U.S. debt market relative to short-term securities.
But Trump can't easily control the Fed's decisions just by firing its chair. Hear why here.
And if you're in the mood for listening, check out this week's episode of the pod. We are going deep on the race between the world's two largest automakers, China and the United States. The People's Republic is well out in front. Listen here for comparisons between the United States and Cuba, and innovations such as hot pots in cars.
AI fever is keeping things positive on equity markets today. TSMC, the world's largest contract chipmaker, posted a forecast-beating 60% jump in second-quarter net profit on the back of surging demand for semiconductors used in artificial intelligence applications. Meanwhile, Swiss engineering group ABB reported its highest-ever quarterly order intake, helped by surging demand for products used in AI data centres.
ABB's results and optimism over a potential U.S. trade deal have helped European stocks regain the lead over Wall Street. The broad European STOXX 600 index is up over 7% so far this year compared to 6.5% for the S&P 500. This year's surge in the euro, which is close to $1.20, makes European stocks cheaper for U.S. investors and Wall Street more expensive from Europe.
But as my colleague Alun John points out, the European rally is narrow and largely focused on two sectors, defence and banks, suggesting a lack of faith in the broader market. European real estate, meanwhile, is stuck in "zombieland" with the region's commercial property market defying expectations of a recovery.
Finally, the French government thinks the country has too many days off for its own good, but its proposal to cull some public holidays may not produce much of an economic benefit. That's because leisure can provide an economic boost. In fact, studies find that output increases along with the number of national holidays - up to a point.
As always, I'd love to hear from you by hitting reply on this email or finding me on LinkedIn.
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