Making sense of the forces driving global markets |
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A dramatic day on Wednesday ended with Wall Street in the green and the dollar and short-dated Treasury yields lower, although off their earlier extremes, after President Donald Trump denied reports he will soon fire Fed Chair Jerome Powell. More on that below. In my column today I look at Trump's call for 300 basis points of Fed rate cuts and, although it is wishful thinking, why it shines a light on whether Fed policy is too tight, too loose, or maybe just about right. |
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- U.S. Treasury yields fall across the curve, mostly at the short end - 2-year yield falls 7 bps.
- The 2s/10s U.S. curve steepens through 60 bps, its highest in nearly two months. It steepens for a fourth day, its longest streak this year.
- Wall Street rises, led by small caps - the Russell 2000 gains 1%, clawing back half of the previous day's losses.
- The dollar index snaps a six-day winning streak and falls around 0.3%.
- Gold rises 0.8% to $3,350/oz.
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Trump-Powell drama sizzles, dollar fizzles |
At around midday in the U.S. session on Wednesday, it looked like six months of verbal attacks on Fed Chair Jerome Powell from President Donald Trump for not cutting interest rates were about to reach boiling point - according to Bloomberg News, Powell would soon be fired. The market reaction was what you might expect - the dollar, stocks, and short-dated Treasury yields fell, and the yield curve steepened. The most notable moves were in the dollar and two-year yield. But Trump swiftly denied the report, insisting that although he had discussed ousting Powell with lawmakers, it was "highly unlikely" he would fire him. Markets recovered their poise, especially stocks, although the rebound in short-dated yields and the dollar was less pronounced. Trump firing Powell would be a monumental event as no President has ever formally dismissed a Fed Chair. But it would come as little surprise. Trump's desire for lower interest rates is ferocious, and he regularly berates Powell for not cutting them. Political interference in monetary policymaking? Yes, but Trump crossed that Rubicon some time ago. Rates traders still expect no change from the Fed on rates later this month and a quarter point cut by October. They added around 10 bps of expected easing into next year's forecasts. |
Even at the depths of the selloff on Wednesday Wall Street's main indices were never down more than 1%, perhaps reflecting investors' skepticism that Trump really will pull the trigger. But it's noteworthy given that the S&P 500 and Nasdaq had clocked new highs the day before - there's scope for a deep correction if investors want one. The latest twist in the Trump-Powell saga dominated the U.S. session and will likely be the main driver of global markets again on Thursday. But investors have other signposts to guide them, including corporate earnings, tariffs and economic data. On Wednesday three of America's biggest banks reported results - Bank of America, Morgan Stanley and Goldman Sachs. On Thursday the spotlight turns to Netflix, and before that in Asia, Taiwan's TSMC, the world's main producer of advanced AI chips. |
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Trump boxes in Fed with extreme rate cut calls |
While almost no one thinks Donald Trump's verbal attacks on Federal Reserve Chair Jerome Powell are a positive development, they have electrified the debate about whether the U.S. president is right that interest rates are too high. Presidential tirades aside, there is a strong case to be made that the fed funds rate should be lower than its current 4.25-4.50% target range. The labor market is beginning to show signs of cracking, 'hard' economic data is softening, and a tariff-led slowdown may be in the offing. On the other hand, economic growth is clocking in at an annualized pace of around 2.5% and not expected to dip much below 2% next year, unemployment is still historically low, the stock market is at a record peak, and other financial assets like bitcoin have also never been higher. And, crucially, core inflation is still almost a percentage point above the Fed's 2% target, suggesting that we may be starting to see the inflationary impact of tariffs. By those measures, policy may be too loose, not too tight. |
Indeed, Jason Thomas, head of global research and investment strategy at Carlyle, reckons financial conditions are "unusually accommodative", and argues that had the Fed not said in December that policy was 'restrictive', there would be no need to explain why it hadn't cut rates six months later. The president clearly does not agree. Trump is clamoring for borrowing costs to be slashed by 300 basis points. That would take the policy rate closer to 1%, a level usually associated with severe financial market stress, strong disinflationary pressures or a deep economic funk. Or all three. |
What could move markets tomorrow? |
- Australia unemployment (June)
- Taiwan's TSMC Q2 earnings
- Japan trade (June)
- UK unemployment, earnings (June)
- U.S. weekly jobless claims
- U.S. Philly Fed business index (July)
- U.S. retail sales (June)
- U.S. Q2 earnings, including Netflix
- U.S. Fed officials scheduled to speak: San Francisco Fed President Mary Daly, Governors Lisa Cook, Andriana Kugler and Christopher Waller
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